Is VIX Close to a Spike?
By Steve Sears
The stock market is sharply lower, and many investors think the Chicago Board Options Exchange's Volatility Index (VIX) should be much higher than 24.71. A mid-20 reading suggests investors are not that bothered by Tuesday's sharp drop of the Standard & Poor's 500 Index. If only it was that simple.
VIX's level is influenced by VIX futures. The August VIX futures contract closed at 21.90, up 5.8%. That VIX is at a premium to VIX futures shows investors are more afraid than VIX's 24.71 number would suggest. The fear index is also influenced by actual stock price performance. In recent weeks, stock prices have been reasonably bullish and so realized volatility has been fairly subdued.
VIX's 20-day realized volatility was 17.36, while five-day realized volatility was at about 6.7 – essentially telegraphing an all-clear signal – until the middle of the day. Five-day realized volatility ended Tuesday at 16.8. What does all this realized volatility mean? It means that VIX, which expressed implied volatility – that which may occur in the future – is now untethered, and some traders think it could spike sharply higher.