Hey Traders,
CNN Business recently decided to dive into a story about the VIX.
In the story, the reporter attempts to break down why the VIX has ‘not worked’ over the last few months.
CNN Business took a dive into the VIX index in an article trying to analyze why the VIX is not behaving the way traders would normally expect.
In June, as markets were melting down, the VIX only reached a high of 35.05.
Considering at the time the S&P 500 had fallen almost 900 points in a few weeks, one would think the VIX would have blown up.
But it didn’t.
The reporter, who did a decent job breaking down what happened, concluded with this as the bottom line:
The bottom line: In uncertain times, we like to cling to any future reassurances that we can, and the financial media certainly likes to use the VIX to that end. But when the unknowns are unknown, the VIX tends to break down.
This is where she got it wrong.
The VIX is specifically designed to blow up when we have unknown … unknowns.
Take the early stages of Covid inMarch 2020 …
In less than a month, the VIX went from sub 20 to over 85.
This was likely the greatest unknown …unknown of our time.
So what is the real bottom line?
There are two!.
- The actual realized volatility of the market.
VIX predicts, but part of that prediction is the way the market is moving … past performance is not a prediction of future performance … but for markets it sure seems that way.
So how much is the S&P 500 actually moving?
10-day realized volatility is at about 22, 20-day and 30 day are at about 20.
VIX is pricing at a really heavy premium to the market.
VIX, in other words,is doing its job.
The second answer actually speaks to the reporter’s bottom line…
- Are we really in an unknown…unknown. The answer is unequivocally no! We are very known, unknown.
The Fed is raising rates and reducing its balance sheet …
Europe is in an energy crisis.
There is a war in Ukraine …
And the US is entering a recession.
How much, how bad and how long are our unknowns
But the problems are known.
The problems lead to a market that drops … but may not blow up the VIX.
Think of it this way …
In horror movies, what is the scariest part …
The actual murders … or the lead up when the killer is unseen and their location is unknown.
The former is much worse for the character …
The latter is much, much scarier.
Welcome to the VIX.
Your Only Option,
Mark Sebastian
Founder & CEO
Option Pit