More On $VIX Crossovers

By Lawrence G. McMillan

We have written about crossover signals from the CBOE’s Volatility Indices in the past.  In particular, we want to present research on sell signals generated when $VIX rises above $VXV.   But first, we want to update the statistics on the systems that we have presented previously, with regard to these crossovers.

One article showed that $VXST crossing above $VIX is a signal that volatility is about to increase.  That means realized volatility is about to increase, not implied volatility.  This is a somewhat useful indicator, but it is not directional.   The market may rise or fall after such a crossover, but it will do so with more rapid movements – i.e., with increased actual volatility.  Our advice when that crossover occurs is to buy 3-week straddles on the broad market (SPY or $SPX, for example).  That strategy was discussed in detail in Volume 23, No. 4.  

The last time that crossover occurred was on January 15th, when $VXST crossed above $VIX, with $SPX near 1990.  Almost immediately, volatility increased, and $SPX rose to 2060 very quickly.  It has since moved even higher.  While that was happening, the 10-day historical volatility of $SPX increased from roughly 14 to 19... 

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