Options Volatility Watch: What’s Going On With The VIX?
If you’re an active investor – or even if you just follow the markets – it pays to know what the VIX is doing. That holds true whether or not you trade options. The VIX is an important indicator for all types of investors.
First off, what’s the VIX?
The CBOE S&P 500 Volatility Index, or the VIX, is often considered an investor fear gauge. It measures the volatility for a series of options on S&P 500 stocks.
Basically, the VIX measures the market expectation of how volatile stocks will be over the next 30 days. The higher the VIX, the more the market expects the S&P 500 to move.
Here’s the thing…
Typically, a higher move in the VIX is correlated with a lower move in stocks. That’s because investors tend to buy options to protect (or profit) from a major downside move. In other words, investors expecting stocks to fall are more likely to buy portfolio protection then when stocks are going up.
After all, it’s only natural to worry less about the downside when stocks are rallying or are in a bull market. As always, fear is an important driver in the financial markets.
As such, the VIX makes an excellent measure of investor fear. Many investors look to the VIX to gauge how worried they should be about a potential selloff.
That being said, what’s the VIX been doing lately?
Surprisingly, the “fear gauge” has been fairly calm. In fact, it’s been sitting at bull market type lows. As of this writing, the VIX is trading at 12.70. To put it in perspective, the 52-week range of the VIX is roughly 11 to 28.
Essentially, despite Cyprus, Sequestration, and everything else you see in the headlines, investors just don’t seem to be that worried.
Now, we’ve had a few minor spikes in the VIX recently. For instance, near the end of February, it hit an intraday high of over 19. But, the spikes have been very short-lived – no more than a day or two at most.
More importantly, from 1990 until today, the average VIX price is just over 20. So, these minor price spikes aren’t even crossing the long-term average price.
Using the VIX as a guide, it’s hard to be too worried about a major selloff at this time. Of course, that could change in a hurry. But, we should get some indication in options volatility if investors start to worry.
For now, the bull market is alive and well.
Yours in Profit,
Gordon Lewis
Category: Options Trading
