We have been watching the CBOE Volatility index “VIX” over the last several weeks move up and down. Today (4/1/2015) it is trading in the 16 dollar range. The first of January this year it was trading in the 17 dollar range and way back in January 2004 it traded in the 18 dollar range.(1) The VIX is an index that truly does move up and down and it is one that helps us get a sense of implied market directions.
I thought it might be helpful if I explain a little and help define for you the VIX.
The VIX is CBOE Volatility Index. CBOE is the Chicago Board of Options Exchange. The VIX is a key measure of the markets expectations of near-term volatility conveyed by S&P 500 stock index option prices. The VIX was introduced in 1993 and is considered by many to be barometer of investor’s sentiment and market volatility.(2)
Often times the VIX is referred to as the “investors fear gauge.” That thought is really incorrect. The VIX is an instrument that as allows for “implied volatility” to be measured. “Implied Volatility” measures the degree to which option sellers are anxious about the current and future market conditions.(2)
The VIX is forward looking and so a rising VIX value reflects institutional concerns with a potential more volatile market. A dollar value of the VIX above 20.00 indicates a rising concerns and the markets participant’s needs to hedge against their positions. The hedging against the potential is just like the beach owner’s desire to insure with protection against the hurricane. The greater the potential the higher the cost of dollar value to protect. The greater the implied thought of a down turn in the market the higher the VIX is and thus the forward thinking of “implied volatility or downturn”.(2)
So as we watch the VIX, we get a sense of market direction and implied volatility. As of now the VIX is in this 13.00-16.00 dollar range. It is moving up, but it has not crossed the 20.00 threshold. So it is indicating volatility, but by itself it does not give enough directional information to make dramatic portfolio changes. We however are also looking at other data and compiling all the information in order to best ascertain where the second quarter of 2015 will go.
As we move into the second quarter we will keep our clients abreast of the changing environment and how we think it should be best navigated.