VIX Properly Reflecting Fear

Over the past couple of weeks I have been out and about representing CBOE and The Options Institute in diverse places such as Schaumburg, IL, San Jose, New York, and Omaha, NE.  On these travels I have often been asked about the persistent low level for VIX despite pockets of weakness in the stock market.  Yesterday is a prime example as the S&P 500 sold off over 2% and VIX closed the day under 16.00.  My understanding is that it was mentioned on one of the business networks this week that investors have more alternatives to hedge so VIX does not reflect fear as it once did.  I could not disagree more with that statement.  VIX reflects the lack of fear and is correctly doing so.  The chart below shows daily closing prices for VIX and the S&P 500 from the beginning of 2014 through the end of the first quarter in 2014 and is a good illustration of why I believe VIX is properly reflecting the lack of fear.

VIX - SPX Spikes

Note the four places on the chart above where I have highlighted spikes in VIX over the past 15 months.  The S&P will have hit a small rough patch and VIX moves up based on concerns that the market drop may turn into a protracted correction or bear market move.  Now note what happens after these spikes in VIX, the S&P 500 resumes a move to the upside and VIX returns to lower levels.  This pattern continues to repeat itself investors and traders become less fearful of the next drop.  The last real volatility event in the US occurred back in August 2011 which seems be quickly becoming a distant memory for many traders.

Part of the argument about VIX not reflecting fear is that there are more alternatives to hedge against a drop in the equity market.  This is an argument that I have a tough time with when I consider exactly what VIX represents.  VIX is the implied volatility of options based on the S&P 500 or SPX Index options.  Average daily volume for SPX option trading in 2013 was about 823,000 contracts which was a 17% increase over 2012 average daily volume.  So far in 2014 average daily volume for SPX options is running at about 870,000 contracts.  Many listed markets in the US have been experiencing negative or flat volume growth.  If there are new hedging alternatives that are impacting the level of VIX this would mean that SPX volume should be shrinking, not growing.

VIX is doing what it has done for over 20 years – it is properly reflecting the lack of concern in the market when the S&P has a day like yesterday.  The market has become accustomed to small corrections followed by a new high in the S&P 500 and VIX is quantifying that complacency through being a relatively low levels.  When we get the next real volatility event that should quiet the critics that say VIX has undergone some sort of change – fear will return and with it higher levels for VIX.

  • Frank DeFelice

    Tracking the VIX after the fact is too late. Watch the FED. It’s that easy.

    • XYZ005

      track it for the trend

  • earl carroll

    shorting vix or tvix or uvxy has been the no brainer trade for over 2 years…the tone in the chat rooms and reading of articles and comments on these instruments leads one to believe that only idiots are long vix can’t buy tvix or uvxy on margin and they are down over 95 percent in last 3 years. all those people short these products may have a very bad day soon and stops may get filled at 90 to 200 percent higher than price they are enterered at. it has worked great now for 3 years to short these products on ANY rally…I see a big surprise in store for the shorts and most likely will be a weekend event that causes the Monday open to be 100 percent higher than the stops they have entered …

    • Carleronn

      Exactll….shorts in VXX exceed the amount issued….could be ugly for those “who have sold what isn’t his’n”

  • Tom Blech

    Did anyone catch the quote about “more places to hedge against the equity market”— THAT WOULD BE OIL—

  • Baker Vail

    New paradigm!… Until the laws of gravity return.

  • Bob7

    Russell: Spot on.

  • Frank DeFelice

    The VIX is another useless indicator. It ‘s an after effect.

  • Kenneth Logue

    I would buy around 14>and sell at 20+.genious!

  • Elspeakita

    Trading Options
    Consider the NEW Concept of a Quarter Option (1/4/OP) ??
    Currently, one option is now worth 100 shares of a company. For a company like Google, for instance, the risk in one option could be as high as $63,000, assuming a market price of, say $630, for example. Given the risks inherent in options, at such a magnitude the ordinary individual cannot possibly afford to take a chance at trading an option in Google, where a lot of money can be made. So, if trading in Options could be expanded to include One Quarter Options (1/4/OP) the risk in the Google example would only be $15,750, instead of $63,000, a very big difference. This could open up the Options industry a little more to the ordinary investor. Don’t you think? I should point that I am not a trading expert or a licensed trader. I am just an ordinary Joeblo observing how the Options Industry could be changed to benefit many more ORDINARY investors. WHAT DO YOU THINK?

    • IB

      Options contracts with a smaller contract size – 10 rather than 100 – already exist for many liquid names, including Google.

  • Mikey Arcand

    duh stocks go down fear goes up not exactly anything to go on for future investing short term