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VIX: Cheap or Expensive?

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Every time the CBOE Volatility Index (VIX) makes mainstream news headlines, we get questions from readers and clients about whether a given VIX level means it is or isn't a good time to sell option premium, trade iron condors, etc. The answer is always: no.

The nominal level of VIX is, by itself, meaningless. VIX, or any other estimate of option implied volatility, only means something in the context of realized market volatility. A VIX above 30 might well be cheap if the market is expected to move at a 45% annualized rate of realized volatility, while a VIX below 10 could be extremely expensive if the S&P 500 is moving at a volatility of 4%.

A lot of the positions we trade are typically held for 30-90 days, while the VIX cycles that most people watch last many, many years. Remember that implied volatility can remain low for as long as the market can remain quiet. Given that bull markets and economic upswings last on the order of years (or even decades), not weeks or months, even if you correctly call the exact cyclical VIX bottom, that won't be relevant to a short-term trade.

Analysis should match the trade: option traders shouldn't be paying too much attention to the spot VIX, anyway. The shape and level of the VIX futures term structure is often more informative. When we monitor overall market health, we also look at the state of SPX implied volatility skew and the relative ranks of major asset volatility risk premium. Those metrics are far more informative about likely short-term movements in the market. VIX-watching is a fun hobby, but using VIX to time entries for advanced option spreads is kind of like using a magnifying glass to make astronomical observations.

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