http://www.theoptionsinsider.com/comment/?id=60 (I tried to copy and paste all of this one, but there were a bunch of charts, etc. that wouldn't copy, so check out the link for the full story) The Capricious VIX Posted on 8/28/2007 in Trading & Technology by Mark S. Longo The Capricious VIX When I wrote about the CBOE Volatility Index (VIX) a few weeks ago (Is The VIX Finally Here To Stay?), I was impressed that the VIX had managed to remain above 20 for six consecutive trading days. It was a feat that was unrivaled since the dark days of September 2003. Despite this support, many traders questioned whether the fickle VIX would reach 30 or retreat back to the range that it languished in for years. Of course, a great deal has occurred since I first posted that comment letter three weeks ago. The VIX promptly tested 30 a week later and reached an intra-day high of 37.5 within two weeks of that letter. The VIX had effectively doubled since mid-July. That's quite a rally for an index that was trapped in the mid-teens for nearly four years. A Long Strange Trip A quick glance at that chart shows that the VIX has had a rather placid history over the past few years. This extended period of calm makes the turbulence over the past month even more interesting. After lingering in the background for years, credit fears have exploded to the forefront, driving the VIX up to 37.5 in less than a month. However, shortly after reaching that high, the Federal Reserve stepped in to calm the market's jittery nerves. This action cut the VIX nearly in half over the next seven trading days and almost succeeded in driving the index back into the teens. This activity has left many traders scratching their heads. What does all of this rallying and retreating signify? Have the fears of a looming credit implosion evaporated? Is the VIX headed back to its normal trading range in the mid-teens? Full of Sound & Fury, Signifying Nothing... Traders that put a great deal of stock in such trading ranges would do well to look at the calendar. After all, these are the dog days of summer. Most of Wall Street has retreated to The Hamptons, leaving behind a market that could best be described as thin. As a result, the broad market is susceptible to erratic movements that wouldn't normally occur in an active trading environment. The same holds true for the options market. The options pits in Chicago, and the electronic trading bins around the world, are nearly empty. Despite a few days of abnormal volume, trading in the SPX is lingering at the usual summer levels. As a result, front-month ATM volatility in the SPX can easily be driven outside its normal range with just a few trades. Keep this in mind the next time that you see the VIX doubling or being cut in half in the space of only a few days. http://www.theoptionsinsider.com/comment/?id=60
I'm hardly an expert on the VIX. That's why I read so many articles about it. I tend to agree with this article's point that these are the dog days of summer, so volume is thin. That's a point that I haven't seen brought up in many other places, even though everyone is wringing their hands over the VIX these days. As for where it's going, it looks like the "smart money" that picked 20 before 40 were correct. If I had to guess, though, I'd probably have to say that we're headed back to 30 instead of back into the teens. Just my $.02 P.S. - I'm not sure if I understand your question regarding SPY & the VIX. The correlation between SPY and VIX is pretty well established, is it not (e.g. VIX goes up when SPY goes down, and vice-versa). Is that what you're asking?