The VIX Explosion of 2024

History’s second-largest overnight percentage change in the VIX's close price rocked the markets on Monday—a staggering 64.9% increase

• On Monday, Aug. 5, 2024, we witnessed the second-largest overnight percentage change in the VIX's close price in history, a staggering 64.9% increase.

• Historically, a VIX between 15-20 accounted for only 1.64% of the total 325 large SPX drawdowns since 1992.

• High VIX levels are riskier than low ones, contrary to some market experts' views.

If stock market volatility is the active investor’s friend, this has been quite a week. We’ve seen stock prices plunge and recover with a neck-snapping velocity that’s nearly unprecedented.

On Friday, the VIX— short for The Chicago Board Options Exchange's volatility index—reached its highest level in nearly 10 months of prolonged low volatility. It closed at 23.39, entering the 20 zone for the first time since Oct. 27, 2023.

Things really heated Monday. We witnessed the second-largest overnight percentage change in the VIX's close price in history, a staggering 64.9% increase. That was second only to the 115.6% change on Feb. 5, 2018.

Such violent overnight movements in the VIX are extremely rare. That’s because 93.57% of the time, the VIX’s close-to-close percentage change doesn’t exceed 10%, and 82.26% of the time it doesn’t surpass 5%.

Thus, Monday’s sudden eruption stands out as a significant outlier in the VIX’s history.

While the VIX has remained much higher during the bear markets of 2008 and 2020, those spikes occurred over a longer duration and not as abruptly. What should we know about these sudden spikes, and how can we contextualize them historically?

The calm before the storm

I was on a tastytrade brokerage research team that studied a market measure that anticipates large SPX down moves based on differing VIX conditions.

While it’s true there’s a calm before the storm, the low VIX zone is by no means more dangerous. On the contrary, the calm can last a long time, and active investors should enjoy the favorable weather while they build up a supply of metaphorical sandbags, plywood and drinking water to prepare for the storm.

In the study, we noted the most frequent large SPX drawdowns occur when the VIX is at 20. However, the markets’ recent behavior did not entirely align with the study, particularly in predicting the violent overnight VIX surge.

The study’s main takeaways were:

1. When the VIX is below 15, the market tends to remain calm.

2. When the VIX moves above 15—and especially when it crosses 20— investors should prepare for a greater risk of large drawdowns.

Based on over 8,688 trading days, large SPX drawdowns are rare and least likely to occur when the VIX closes below 15. There have been only 14 instances when the VIX was below 15 the day before an SPX drawdown of 2% or more, accounting for just 0.16% of trading days.

This was illustrated on July 23 when the market plunged by 2% or more, despite the VIX closing below 15 at 14.72 the previous day. This highlights the fact that outlier events, particularly those compounded by earnings and macroeconomic data, can occur even though they’re rare.

The danger zone

As shown in the accompanying table, the probability of large drawdowns increases significantly as we move from a calm, low VIX zone to a higher VIX zone. Historically, a VIX between 15-20 accounted for only 1.64% of the total 325 large SPX drawdowns since 1992. However, the risk increases sharply once the VIX crosses the 15 level, indicating a 234.69% jump in risk.

When the VIX is above 20, the likelihood of an SPX drawdown of 2% or more is eight times higher compared to when the VIX is below 15. On Friday, the VIX closed above 20 for the first time since late October 2023, marking a critical danger zone that coincided with another major SPX drawdown of 2% or more. If anything was a sign of risk, it was on July 18, when the VIX closed above 15 for the first time since May 1, breaking a two-month period of calm. This low-VIX zone was characterized by a slow and steady uptrend. The analysis emphasizes that the VIX is a reliable signal for anticipating risk and the low-VIX zone is historically safe until broken. Calm can continue for a considerable amount of time until the arrival of the storm. However, traders can always adjust their positions when the market sends an alarm. Coincidental or not, July 18's VIX break above 15 exposed us to a potential large SPX drawdown of 2% or more, increasing the risk by nearly 200% compared to when the VIX is below 15. Aug, 2's VIX break above 20 exposed an 800% increase in risk compared to when the VIX is below 15. In hindsight, both large crashes were potentially avoidable for traders who respect the VIX as an objective market signal of risk ahead.

Clustered drawdowns

With two nearly consecutive drawdowns of 2% or more in the SPX, does it indicate a bear market year like 2008 or 2020? It’s unlikely. While a 2% or more daily percentage change in the SPX is not statistically uncommon, most such movements are concentrated in bear market years, with few occurrences in other years.

The data shows volatile markets often compensate for large losses within a short period; large downward moves are followed by equally large upward moves. This roller-coaster pattern of large market drawdowns followed by significant market upsurges is characteristic of a high VIX trading environment.

Trading strategies

Different VIX zones require different trading strategies. When the VIX closes below 15, SPX movements the next day typically do not exceed 0.5% in either direction. As the VIX increases, SPX intraday movements also widen significantly.

Outlier moves can happen in any VIX zone, especially when compounded with earnings and macroeconomic data. No formula is perfect or invulnerable, and outlier events can defeat any statistical model.

For example, on July 23, the VIX closed below 15, yet the SPX crashed 2% or more the next day. When the VIX closed at 38.57 on Monday, there was a 66.5% probability the SPX would move within a 2% range above or below its previous closing price. High VIX zones can push prices to extremes in either direction, making VIX-based range targets ideal.

Respecting the signals

The large VIX percentage change demonstrates that unpredictable events such as earnings, geopolitics and market data can override statistical expectations.

Nevertheless, high VIX levels are riskier than low ones, contrary to some market experts' views. Stocks tend to climb through slow, steady movements during bull markets, while they fall fast, often with warning signs like the VIX entering a dangerous zone. Active investors should respect market signals and recognize the market is always right.

Now, the VIX has fallen significantly following a relentless upsurge and intraday reversal. This is typical of a high VIX zone, often characterized by large intraday crashes followed by equally violent rallies.

The key question for traders is this: How long will fear last, and is this the end?

Jiajun Zou is a research and development intern at tastylive with a focus on artificial intelligence, and stocks and options statistics. Zou, a PhD candidate at Emory University, is studying history using large language models and mathematic geospatial techniques.

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