Well, that didn’t take long.

1) Is Shorting Volatility a Free Lunch?

2) What Happens When Volatility Rises?

These were the titles of my last two posts.

And today both questions were answered in extreme fashion.

The Volatility Index (VIX) rose 46%, the 7th largest 1-day spike in history.

The S&P 500 declined 1.8%, its largest drop since last September (while it felt like a large drop note that in a historical context this move was quite common).

The short volatility ETN (XIV) suffered a 17.8% decline, its 6th largest since inception in November 2010.

Those shorting the long volatility ETN (VXX) saw it rise 18.4%, its 5th largest advance since inception in January 2009.

Is panic selling a good idea after such spikes in volatility?

Not necessarily. Looking at the top 20 largest VIX spikes in the past, we find that over the next day/week/month volatility tends to fall and the S&P 500 tends to rise.

If we extend this list to the top 100 VIX spikes we find a similar result: lower volatility going forward with positive S&P 500 returns on average.

Will we see the same today? I have no idea. These are just averages and there have been a number of times in the past where volatility spiked and bad things followed. But more often than not, the opposite occurred, with volatility coming back down in the near term and stocks bouncing.

The best we can say after today is that shorting volatility is still not a free lunch and that stocks still tend to go down in the short-term when volatility rises. The extreme low volatility regime that we have been operating in for much of this year is likely coming to an end. Whether that means something bad or just something different (more normal) remains to be seen.