Why Is The VIX So High?

| August 28, 2015 | 0 Comments

brokerWhy Is The VIX So High?

Unless you’ve had no contact with civilization over the past week, you’re likely aware that the stock market has gone through something of a correction.  Moreover, volatility has been through the roof.  In fact, the VIX reached its highest level since 2011.

As a brief reminder, the VIX (S&P 500 Volatility Index) is a measure of implied volatility levels on S&P 500 options.  As many of you know, the VIX is often considered the market’s fear gauge.  Overall market volatility is most commonly tracked by watching the VIX.

Once again, an excellent resource for those who are interested in learning more about the VIX is the CBOE VIX mini-site.  It has a ton of valuable information on the index.  Follow the link if you want to learn more.

It’s generally a good idea to keep an eye on VIX levels (not just as an options trader) to get an idea of how concerned the crowd is about a big market move.  Because the VIX spiked with the big selloff, you know investors were basically in panic mode.

As a quick aside, I’ve written a lot about volatility in the past, and you can check out this article to learn more about why volatility is important.

Let’s get right to the VIX chart to see what happened this past week…

large trade in VIX options, a chart of VIX

It’s pretty clear to see how much of a spike we had in the VIX.  The volatility index soared higher, before halving its gain over the past couple days.  Although, relative to the moving average, the VIX is still trading at high levels.

Should the VIX be this high?

It really all depends on your perspective.  Given the steep drop in stocks over a very short period of time, you could argue the spike in volatility is justified.  After all, the S&P 500 did take something like a 10% beating in just one week.

That sort of correction generally does come with a certain amount of fear.  What tends to happen is sharp moves activate margin calls and automated selling programs.  Those big sell programs cause the selloff to snowball even further.

So from that angle, yes the VIX reaching a high of 40 does make a certain amount of sense.

So, given the VIX spike, should we be worried about even bigger downside?

Here’s the thing…

The VIX itself didn’t reach the levels of the 2008 financial crisis (and rightfully so).  However, the speed of the VIX’s climb did set records.  Investors’ fear was seemingly more pronounced this past week than during the 2008 crash.

To me, that makes absolutely no sense.  Yes, China’s economy is a concern (and is what led to this selloff to begin with).  However, there’s a fraction of the risk now than there was when Lehman went bankrupt.  For some reason, investors were very quick to pull the sell trigger this past week.  Yet, there really should be no comparison between this selloff and 2008-2009.

While we still need to pay attention to the VIX, I’m not overly worried about some kind of market crash, or even another 10% correction.  The VIX may remain elevated for the time being, but we certainly experienced a measure of overselling.

Yours in Profit,

Gordon Lewis

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

Tags: , ,

Category: Options Volatility Watch

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

Leave a Reply

Your email address will not be published. Required fields are marked *