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Reflections on quoting percent changes in vol
Friends,
A reliable way to have Nassim Taleb come through your window to call you an iiiiidiot is to see a stock crash and say something like “That was a 10-standard deviation move!”
On #voltwit, the corner of fintwit with an option fetish, a surefire way to get QVR’s Benn Eifert to QT you is to quote VIX changes in percent terms.
The topic resurfaces every time VIX makes a large move, voltwit predictably reacts so I figured Grok (X’s LLM chatbot) must know about this.
I asked Grok some questions and sure enough it seems like it’s been paying attention.
“Is it wise to quote VIX changes in percent terms?”
Volatility of Volatility: The VIX itself is inherently volatile, so small percentage changes might not always reflect significant shifts in market sentiment or conditions.
Misinterpretation: Large percentage changes from a low base might exaggerate perceived market fear or complacency. Conversely, small percentage changes at high levels might understate the market's condition.
Contextual Information: Percentages without context (like the baseline level of the VIX) can be misleading. A 5% increase in VIX might mean different things at different times.
“Do vol traders dunk on tourists who quote VIX percent changes?”
In the trading community on platforms like X, there's often a playful or critical banter between experienced volatility (vol) traders and those perceived as "tourists" or less experienced traders.
Misinterpretation Risks: Vol traders often emphasize that quoting VIX in percentage terms without additional context can lead to misinterpretations. For example, a 10% increase from a very low VIX level might not be as significant as the same percentage increase from an already high level.
Benn’s primary gripe with VIX percents is the behavior of VIX is level-dependent. Its distribution is not congruent at high and low levels of vol.
Notice how the Y-axis is VIX vol points not percents.
In chatting with Benn about this article he pointed out a basic mechanic that makes vol level-dependent:
Volatility is inherently about squared returns, so you can have a very low base level of realized vol but all it takes is one big-ish sized return and because we're squaring it (along with all the other little returns in the window) it's going to have a massively outsized impact on window realized volatility. That makes vol very jumpy from low levels.
Another vol manager, Kris Sidial of Ambrus, explains it simply. Note my response below it.
There are multiple contexts in which it is quite useful to measure percent changes in volatility. There are tradeoffs, as you’d expect with any measure. But I’ve always been forceful about the need to slice things from different angles. It’s a healthy way to identify mixed signals, but it’s also affirming when sufficiently different angles agree.
A good example of this “multiple angles” idea is the 2 part series:
Let’s get into a few reasons to measure vol in percent changes.