It’s Almost Too Quiet… Looking At Volatility Index History
🚀 What’s happening: Investors are on pace to trade a record number of options (options are just bets on the future) this year of the VIX Volatility Index.
Huh?
So volatility is just another way of saying how quickly assets move up and down; the VIX volatility index measures this behavior for stocks and lets investors know how quickly the market is moving up or down (because of this Wall Street investors appropriately label it “the fear gauge” because when it’s high it can signal there is a lot of panic selling).
While not exact science, VIX values of greater than 30 are considered to signal heightened volatility from increased uncertainty, risk and investor fear. VIX values below 20 generally correspond to more stable, less stressful periods in the markets.
We are currently at about a 17 VIX reading (you can check it here) and the index has been sitting at an unusually low level for most of the year; but what’s interesting is that investors don’t expect the calm to last much longer.
Explain.
Wall Street has traded an average of 742,000 options tied to the VIX every day this year which is 40% higher than 2022 and already beats the full year record of 723,000 in 2017.
As we noted above, an option is just a fancy way of saying a bet on the future, and most of these investor bets signal that people think things won’t remain calm for much longer. We are not saying that the professionals always get it right (they don’t), and the S&P 500 is up over 10% this year after all; but recent activity would suggest the professionals see more storm clouds ahead.
👪 Closer to home: Whether we actively invest our money or only think about how the stock market is doing from time to time, the VIX index is a good temperature check to know about (and show the kids).
We honestly don’t know if Wall Street is right in forecasting a downturn in the market through all of the options buying but what is clear is that we are all living through a strange economic time making the future very hard to predict accurately for anyone.
What is most important in any of the investing you do is to not risk what you don’t have (keep enough cash saved for a rainy day!) and try to diversify your investments to not create too much risk in one bet.
Some further reading:
