The Volatility Curve and a Black Swan Story

I go on vacation for two days and believe the government was going to have everything worked out when I returned.  It appears things are still uncertain and the introduction of the Short-term VIX (VXST – 23.54) has proven to be very timely.  Although introducing a new volatility index in early October is usually a pretty timely idea.

To get myself caught up from doing my best to take a break from the markets I took a look at what VXST, VIX, and VXV have done over the last couple of days.  I must admit I was a bit startled at the curve shift over the past two days.  Since a picture is worth a 1000 words I created a nice volatility curve chart showing the relative levels for 9-day, 30-day, and 93-day implied volatility over the past three trading days.

VXST - VIX - VXV

For the record VXST rose 4.44 today to close at 23.54, VIX was up 2.59 to 18.66 and VXV rose 1.49 to 18.41.  So it appears that the market thought a resolution was in the bag on Friday and the quick shift higher of all three indexes is an indication of a combination of disappointment and some fear as to what may be on the horizon for the equity markets.

Finally, so how does a Black Swan figure into this blog?  When arriving at the water park the Rhoads family chose for R and R there was a man making balloon animals to keep kids occupied while their parent forked over their credit card to cover multiple incidentals to come over the next few days.  When my youngest was asked what animal she wanted the response was, “A Black Swan”.  The level of pride from this proud father also cannot be expressed in words.

Black Swan

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Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…

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