Even As VIX Collapses, Implied Volatility Of Individual Stocks Is NOT Dropping

With the huge drop in VIX on Monday, and the huge premiums long-dated VIX futures are carrying, the news flow of stories, blog posts and tweets spouting various “statistics on statistics” is massive.  I have to admit, that I’ve gotten caught up in the unprecedented action myself.  But there’s a lot more to this story than just the action in VIX and its various derivatives (futures and ETFs).

Although the implied volatility of index options is collapsing, the implied volatility of individual stocks is NOT dropping!

Here’s a 1-month chart of our ODDS Constituent Securities VolatilityIndex.  It’s the average of the constant 30-day implied volatility of the options on each of the 500 constituent securities in the S&P 500.  You can see how it has risen since mid-September, and was flat last week.

Volatility Index

Photo: Beta Odds

At the other end of the spectrum, here’s a 1-month chart showing the action in VIX.  You can see how it has been dropping, even before Monday’s big decline.

S P 500 volatility

Photo: Beta Odds

The result is a huge decline in our ODDS 30-day Implied Correlation Index that started a couple of weeks ago.


Photo: Beta Odds

Now, before any sceptics say that my maths or data may be screwed up, be sure to check out the action in the CBOE’s Implied Correlation Indexes, especially the 2011 version.  The chart below shows that ICJ has fallen off a cliff, which means that the gap between VIX and the implied volatility of the January 2011 options on 50-largest component securities in the S&P 500 is widening back out.

Correlation Implied

Photo: Beta Odds

It’s happening folks.  VIX may be dropping, but the implied volatility of individual stocks is not.

– Don

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