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The VIX Dog That Didn’t Bark

February 7, 2021

By Rick Roche, CAIA

In the story, “The Adventure of Silver Blaze”, Sherlock Holmes solves a mystery in part by when no one he’d spoken to during an investigation mentioned that they heard a dog bark the night a famous race horse was stolen and the horse trainer was killed in a stable. See the exchange below:

Scotland Yard Detective to Holmes: “Is there any other point to which you would wish to draw my attention?”

Sherlock Holmes: To the curious incident of the dog in the night-time.”

Scotland Yard Detective: “The dog did nothing in the night-time.”

Sherlock Holmes: “That was the curious incident!”

{The fact the dog didn’t bark led Holmes to the conclusion that the evildoer was not a stranger to the dog. Otherwise, the dog would have barked. Holmes deduced that because the dog didn’t bark (a negative fact), it had to be someone who was familiar to the dog and horse stable.}

In January 1983, the Commodity Futures Trading Commission (CFTC) approved the first options based on stock index futures contracts including an option on the Standard & Poor's 500 Index (SPX) futures contract on the Chicago Mercantile Exchange. In March 1983, options contracts based on the S&P 100 index began trading on the Chicago Board Options Exchange (now known as Cboe®). Four months later, options contracts started trading on the S&P 500 Index®.[1] {An option on a futures contract gives the holder the right, but not the obligation, to buy or sell a specific futures contract at a strike price on or before the option's expiration date. These options work similarly to individual stock or index options but differ because the underlying security is a futures contract regulated by the CFTC.}

Since 1983 then, traders, investors and academics have used options on index futures contracts and index options to extract and estimate implied volatility and the possibility of stock market corrections and crashes. Options prices offer direct insights into the climate of equity investors’ expectations. For instance, an assessed risk of a market crash should lead put options on S&P 500 futures contracts to be priced higher than call options with comparable expiry dates and “moneyness.”

One thorough and innovative study of SPX futures contract options was undertaken by David S.  Bates (1991) following the “Black Monday 1987 Crash”. When Bates examined options prices, “…there were no strong fears of a crash in the 2 months immediately preceding October 19, 1987 – not even late on Friday afternoon, October 16”.[2] So this dog didn’t bark a warning in the two months leading up to the historic Market Meltdown. On 19 October, the S&P 500 fell 20.5% and the Dow was down 22.5%. After the fact, shaken investors sent implied volatility that day and week for both the SPX 100 and SPX 500 soaring to levels well in excess of 100%.[3]

Then along came the VIX. In 1993, the Cboe® introduced the original version of the VIX Index® to measure the market’s expectation of 30-day volatility of the S&P 100 Index as implied by the prices of at-the-money options (see Whaley 1993). The VIX Index® estimates expected volatility by aggregating the weighted prices of SPX puts and calls over a wide range of strike prices (using hundreds of options).

The VIX Dog didn’t bark before the onset of the Global Financial Crisis (GFC). On September 8, 2008 --one week before Lehman Brothers’ bankruptcy filing on September 15th – the VIX Index closed at 22.64.[4] While that’s modestly above the VIX Index’s long-term average (VIX Index average close of 19.1 for 30-yr. period from 1990-2019), it was not flashing warning signals of the immediate collapse of Lehman Brothers nor the troubles to follow.[5]

After Lehman filed for bankruptcy protection, panic ensured. Uncertainty about contagious consequences caused the Credit Default Swaps (CDS) market to freeze.[6]. Subsequent to its demise, it was revealed that Lehman had 1.2 million derivative contracts with a notional value of $39 trillion and hundreds of thousands of counterparties.[7]

The VIX Index® did spike to 31.7 at the September 15, 2008 market close after the news spread of the Lehman filing. And the VIX Index® soared to 46.72 at the close on September 29, 2008 after the U.S. Congress rejected the “Emergency Economic Stabilization Act of 2008” by a vote of 205 – 228. The Dow Jones Industrial Average (DJIA) dropped 777 points on September 29th, the largest DJIA single-day point drop (not percentage) until 2018. Investors were spooked that the U.S. Congress slapped aside the “bank bailout bill of 2008”.[8]

The VIX Dog failed to bark a warning as the Corona Crisis unfolded on U.S. shores. On February 19, 2020, the VIX Index® was resting at 14.38 – well below its 19.1 average daily close and its 30-yr median level of 17.2.[9] On February 20th , the VIX Dog yapped a little – rising to 15.56. It wasn’t until February 24th that the VIX Index® began to signal alarm, spiking to 25.03.[10] It wasn’t until week’s end (Feb 28th), that the VIX Index® was in full panic mode having leapt 2.8 times higher than where it was nine (9) days earlier. Sherlock, where were you when needed?

The U.S. equity market’s reaction reinforce the notion of “news implied volatility” (NVIX) moving the VIX Index® higher (see research cited above). It is this author’s analysis that NVIX drove the VIX Index® to heightened levels due to policy-related uncertainty in the Fall of 2008. Market participants were shocked – shocked I tell you—that U.S. Treasury Secretary Henry Paulson, New York FED President Tim Geithner and the Federal Reserve Chairman Ben Bernanke were not riding to the rescue of Lehman Brothers.

The failure of the Triumvirate above to save Lehman and the Congressional NO vote in late September triggered the market meltdown and spikes in the VIX Index. The VIX Index® remained in the high 60’s, low 70’s and hit a GFC period peak of 80.86 on November 20, 2008.[11]

A similar NVIX scenario arose in February/March 2020. The VIX Dog didn’t growl or howl investor warnings as the U.S. equity market gradually – then suddenly – dropped. On Black Thursday (12 Mar 2020), the Dow Jones Average and the S&P 500 suffered their greatest single-day percentage falls since the 1987 stock market crash.[12] That was followed by Black Monday II on the 16th of March when the DJIA dropped another 12.93%.

The Corona Crash’s carnage to stock prices didn’t stop until late March. On March 27, 2020, the CARES Act, a $2 trillion bipartisan economic relief package was signed into law. This was accompanied by numerous Powell Puts (Federal Reserve Chair Jerome Powell) when the Federal Reserve Bank opened up the spigot with asset purchases and federal backstops galore. Unlike the policy-related uncertainty that marked the run-up to the Global Financial Crisis of 2009-09, federal policymakers responded aggressively in March 2020 to mitigate the economic fallout of stay-at-home directives, job loss, debt default and bankruptcy filings.

Even though the VIX Dog didn’t growl or howl early warnings pre-GFC or COVID-19 Crisis doesn’t mean you’d want to throw the puppy out with the bath water. When considering dog breed analogies, the VIX Dog is more English Pointer than Doberman Pinscher.

Because the VIX is inversely correlated to the direction of equity prices (~.82 CORR from 2008-2019), it reacts quickly at the onset of market regime changes.[13] The VIX Index® is more a “coincident indicator” than a leading indicator of future volatility. There is an adage among volatility traders. “When the VIX is High, it’s time to Buy. When the VIX is Low, it’s time to Go.”

But rather than simply buying (selling) when the VIX is high (low), the genuine fear component of the “Fear Index” is a better guide for making “good” investment decisions. The VIX reveals timely insight for opportunities for investors to potentially harvest variance risk premiums significantly different from zero.[14] Over complete market cycles, the VIX Index® is a fairly reliable and consistent negatively correlated, coincident indicator of near-term implied volatility.


Rick Roche is a 39-year industry veteran, Chartered Alternative Investment Analyst (CAIA)  and Managing Director at Little Harbor Advisors, LLC. Little Harbor Advisors is a sponsor of innovative alternative investments and volatility-informed trading strategies. Rick is a frequent speaker at CFA Societies and Financial Planning Association (FPA-CFP) Chapter events.

[1] “CFTC History in the 1980’s”, accessed at on 12-19-20.

[2] Bates, D., “The Crash of ’87: Was It Expected? The Evidence from Options Market”, The Journal of Finance, July 1991.

[3] Moran, M., and Liu, B., “The VIX Index And Volatility-Based Global Indexes & Trading Instruments”, CFA Institute Research brief, April 2020.

[4] Cboe, VIX Historical Price Data, accessed at ww2.cboe/products/vix-index-volatility on 12-19-2020.

[5] Ibid, Moran, M., and Liu, B., “The VIX Index”, CFA Institute, April 2020, Figure 1, page 3.

[6] Haldane, A., “Rethinking the Financial Network”, Executive Director-Financial Stability at BOE, speech delivered to Financial Student Association in Amsterdam on Apr 28, 2009.

[7] McDonald, O., Lehman Brothers: A Crisis of Value, Manchester University Press, Sep-2016.

[8] “Emergency Economic Stabilization Act of 2008”, Wikipedia entry, accessed on 12-19-20.

[9] Ibid, Moran, M., and Liu, B., “The VIX Index”, CFA Institute, April 2020, page 3.

[10] Ibid, Cboe, VIX Historical Price Data.

[11] Ibid, Cboe, VIX Historical Price Data.

[12] “2020 Stock Market Crash”, Wikipedia, accessed on 12-20-20.

[13] Ibid, Moran, M., and Liu, B., “The VIX Index”, CFA Institute, April 2020, page 4.

[14] Bollerslev, T., Todorov, V., & Xu, L., “Tail Risk Premia and Return Predictability”, Mar 15, 2015, page 1.