SPX Volatility Forecast

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Here are four annualized volatility forecasts for the S&P 500 between now and the middle of June:

At the money SPX implied volatility: 16.50%

VIX-style SPX implied volatility: 20.90%

June VIX futures: 25.00%

GARCH: 17.6%

The first two rely on the observed values of SPX options. At the money SPX options are currently the 1370 strike. Finding the VIX-style average of SPX implied volatility means taking the prices of options at each strike in the series and summing them using the weighting method described in the VIX white paper. The reason that the second estimate is higher than the first is because of the out of the money implied volatility skew (see "Why you should care deeply about volatility skew"). The June VIX futures are not, strictly speaking, a forecast of SPX volatility from today until expiration: strictly speaking, they're a forecast of where the cash VIX index will be at futures expiration (and remember, the cash index is itself a forward-looking estimate). Finally, the GARCH estimate has proven to be one of the most reliable statistical methods for estimating volatility using only historical price data.

Since the year 2000, the average one-month historical volatility of the index (observed daily) has been 18.76%. The current one-month historical volatility is just under 10%. The fact that the market has traded so quietly in recent months relative to long-term averages explains why the prices of options are so persistently high in IV terms. Even so, the 15 point premium of the VIX June contract over recent SPX volatility is pretty remarkable: a doubling in market volatility over the next few months would still leave that contract looking very richly priced.

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At the time of publication, Jared Woodard held positions in SPX and VIX.