In a recent podcast, I was asked about the sharp spikes and steep drops in VIX levels and what that reflected; I was able to get through that with minor scars, but it got me thinking about the volatility of Volatility. Below are a couple of charts that tell the story.
Chart 1 displays the daily total returns of S&P 500, S&P 500 VIX Short-term Futures and VIX Spot indices. As is evident, it looks like white noise, but it also illustrates that swings in daily returns for the VIX Futures and VIX spot indices are more dramatic than those for S&P 500 and that implied volatility is more responsive to market sentiment.
Chart 2 illustrates the annualized rolling 21-day realized volatility for the three indices; demonstrating that the volatility of implied volatility is extremely high. In fact, over this time period (Dec ’05 thru Jan’12) the VIX futures index was 3 times as volatile as the S&P 500 and the VIX spot over 6 times.