When Will the Markets Calm Down?

As the markets come off one of their worst weeks ever, the CBOE Volatility Index has surged to record levels. A VIX above 30 typically represents a highly volatile market. We are now seeing VIX levels in the 70+ range. Investors are betting that these highly volatile sessions will continue for awhile. Near term Put options on the VIX have fallen exponentially since the start of October. Investors buy Puts when they believe the price of a security will fall and sell Puts when they see prices rise. The Oct Put with a $40 strike price, for example, has fallen 91% from Oct 1. The November and December Puts at the same strike are also down considerably.

While it is hard to believe that we can sustain such volatility for an extended time, history shows that once we hit higher levels on the VIX, they do not fall back immediately. On average VIX has held levels for an extended time when above 20, but does drops a bit faster when higher. Historically, the VIX has fallen 46% on average 6 months after it closed above 40 vs. 8% on average 6 months after it closes above 20.

VIX closes above 20
Average 1 month later = 24.8
Average 2 months later = 24.6
Average 3 months later = 24.2
Average 6 months later = 23.8

VIX closes above 30
Average 1 month later = 30.7
Average 2 months later = 27.8
Average 3 months later = 26.0
Average 6 months later = 23.7

VIX closes above 40
Average 1 month later = 37.3
Average 2 months later = 32.8
Average 3 months later = 29.3
Average 6 months later = 25.4

Today, the S&P 500 has rallied with world markets on the open, so the VIX has fallen back below 70. Perhaps recent government actions will calm things down more quickly. Leading the S&P up today are Morgan Stanley , Genworth Financial , XL Capital , Ford and GM .

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