The CBOE Futures Exchange (CFE) recently announced the open interest in VIX futures reached a new all-time high at 282,314 contracts on March 5. The besting of the previous record set a short four days earlier on March 1 is yet one more sign of the increasing interest of the investing masses for the CBOE Volatility Index and its related trading products.
While it is easy to conclude the uptick in activity reveals a rise in popularity, it is difficult to determine what implications, if any, this may hold for the future direction of the VIX Index. While some may contend this is a contrarian indication that the VIX is close to a bottom, such an argument is tenuous at best. Rather than concocting some type of open interest based theory to support a bullish or bearish outlook on the fear gauge, traders would be better served by focusing on tried and true measures that have been quite reliable in forecasting VIX movement such as the price trend of the S&P 500 Index and recent realized volatility.
Don’t overlook the simple inverse relationship between the price movement of the SPX and that of the VIX Index (i.e. SPX down, VIX up). Provided the SPX uptrend continues powering higher I see little reason in attempting overly bullish bets on the VIX. The VIX will not magically reverse its six-month downtrend in the midst of a strong equities market. When the SPX uptrend begins to falter, VIX bulls will have a much more compelling argument.
Yet another indicator far superior to VIX futures open interest when playing the VIX forecast game is recent realized volatility in the SPX as measured by 10 day historical volatility. Remember, the VIX reflects market expectations for how volatile the SPX will be over the next thirty days. Determining how much the market is actually moving in the here and now and comparing it to expectations for future volatility can give you a good idea as to whether or not things seem out of whack.
Over the past six weeks, 10 day historical volatility on the SPX has been languishing around 10%. Absent any type of appreciable increase in this reading it makes little sense to argue the VIX should surge from current levels.
Here’s the bottom line: With the SPX still firmly entrenched in an uptrend and realized volatility in snooze mode, I would remain reticent to making bullish VIX bets.