VIX & VXX After the FOMC Announcement 6-19-2013

Usually ahead of important, potentially market moving events, volatility gets bid.  The chart above shows how VIX rose ahead of both the Greek Elections in June 2012 and ECB announcement in Sep 2012.  With VIX elevated ahead of tomorrow's FOMC announcement, it is likely that VIX will fall after the announcement.

I believe the FED deliberately introduced uncertainty to monetary policy in May's meeting to "take away the punch bowl" in some markets that were showing froth.  Having had the desired effect, I believe that tomorrow's policy announcement would be all about reassuring the markets.

The more appropriate question may then be, to what level would VIX fall if a drop is the likely outcome?

For those of you that have been keeping up with my blog posts, I have a methodology that calculates a "fair value" of VIX.  1) I estimate the appropriate Implied Volatility level based on realized volatility of the SPY, looking at both EGARCH values from http://vlab.stern.nyu.edu/analysis/VOL.SPX:IND-R.EGARCH or calculating my own realized volatility value.  2) I refer to my median VIX analysis to determine the appropriate VIX median value ranges depending on whether SPY is in an uptrend or downtrend.

Fair Volatility Estimate Indicator was developed to give me a simple graphical representation of the above analysis.  Based on chart analysis and FVE indicator (left), VIX is likely to fall to 14.5 - 15.0 level on condition that SPY would not fall below its 20-day moving average level of 164.43.

If VIX were to fall to 14.5-15.0, then VXX could fall to 18.8 - 19.45 based on an average 15% premium VIX July futures would trade over spot VIX with 20 trading days to go before July expiration.