VIX Has Largest Percent Move In History As Goldman Notes Potential “Overshoot”

Last week was historic from a number of standpoint. Not only did the Dow Jones Industrial Average have a never before string of 300 point down moves, and the S&P 500 index posted its largest loss since the once thought infallible Long Term Capital Management team of geniuses finally found gravity in 1998. But it was the recent move in volatility, as measured by the VIX Index, that caught the eye of Goldman Sachs Group Inc analysts.

VIX has largest percentage move in history, up 118 percent

Last week observers witnessed the largest one-week percentage change in VIX history, moving a whopping 118 percent, Goldman Option Research from Krag Gregory and Amitha Kurmala point out. This move might have created a mean reversion opportunity, the pair note. “The VIX overshot its typical beta to the S&P 500 by 6-9 vol points last week,” they noted, saying “the VIX is trading pure risk premium at this point.”

VIX may have overshot, Goldman analysis suggests

With these kind of numbers one might be looking at a theta scalp on both sides of the market, as the Goldman options researchers were not making a directional call. “The next VIX leg up or down may depend upon the global equity reaction,” they said in non-committed fashion. It was later in their August 24 research piece they got specific. “VIX overshoots typically mean that the market is in full hedging mode, bidding up volatility well above what equity moves would imply,” they wrote. “While fair value based upon recent S&P 500 moves may point to a VIX in the low 20’s, we could move much higher before the VIX calms down.”

Is a theta scalp in the offing?

Considering the S&P 500 implied volatility skew at the money, the dramatic market change resulted in change from 10.5 to 30.8, with one month implied volatility standing at 22, up nearly double on a week over week basis. When volatility increases it can dramatically impact an option’s theta calculations. Often professional investors have been known to establish strategies during such periods that take advantage of theta deterioration but do so in a hedged and limited risk fashion.

Goldman wasn’t playing a directional game with pricing, but they did point to the potential for expanding and contracting volatility ranges ahead.