Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Understanding the VIX



The above chart is pretty self-explanatory: the VIX index (a weighted composite of implied volatilities of various index options) at these levels in the past has led to a market decline. The reasoning we have explained before: as investors get complacent they sell options, either trying to earn some premium (thinking stocks won't move much) or through "lifting" hedges (selling out puts they no longer believe they need). Complacency is the opposite of fear and is normally associated with "over-investment".

The story is more complicated than this however. The skew is still not overly flat and longer term options have not come down as much as options out to the end of the year. This indicates some "concern" exists after the elections and into 2005 and 2006. Perhaps this is warranted as more debt from corporations is due later in 2005 and 2006; that process may prove painful if rates rise. Again, the equity markets are inextricably linked to the U.S. bond market and the dollar.

A last observation is that option prices are still higher than actual volatilities: the spread between option prices and actual volatilities are about average. Actual SPX volatilities are near historic lows, trading between 9% and 11%.

The structure of the options market is indicating two things: current high complacency in the short run and in the long run, any declines in the market are unlikely to be a crash scenario (exogenous of a major macro event or a significant decline in the bond markets) like 1987. Rather, declines will be more muted and difficult to maneuver.

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos