How Low Can The VIX Go?

With the bank stress tests results and the April employment report out of the way, volatility is cratering and the VIX (^VIX) is down to 31.45 as I type this.

So how low will the VIX go?

A little more than two weeks ago, in The New VIX Macro Cycle Picture, I suggested that for the current bull leg, 30 was a good guess for a VIX floor. That prediction was part art and part science, to be sure, but there were quite a few technical factors that went into the calculation.

You don’t need a fancy model, however, to make a ballpark prediction for the VIX. I will share a quick and dirty back of the envelope calculation. Since the VIX averages approximately 1.3x the historical volatility of the SPX, one can use the 10, 20 and 100 day historical volatility data to come up with three estimates of the VIX. Generally, I take the lowest one as a floor and average the two readings that are closest together to come up with an expectation of an appropriate current level of the VIX.

With the 10 day historical volatility at 24.10 yesterday, a 1.3x multiplier yields a 31.33 VIX. For the 20 day HV, the numbers are 29.95 and 38.93. The 100 day HV, which includes SPX data going back to December 12^th, is 37.52, with a 1.3x multiplier yielding 48.77.

So…the back of the envelope calculations suggest a VIX floor of 31.33 (today’s low is 31.39) and an appropriate current VIX of 35.13.

Remember that these are guidelines at best and assume that the next 30 days will bear a reasonable resemblance to recent history. Still, they support the contention that we are nearing a VIX floor.

For the record, the lowest 10, 20 or 100 day historical volatility level recorded in the past six months was a 10 day HV of 20.38, which translates into a VIX of 26.69. For anyone looking for the lowest possible extreme in the VIX in the near future, 26 would be a good bet. This is also consistent with my earlier prediction that the VIX is not likely to breach a floor of 25-27.

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