Why There's No Fear in the Fear Index

Focus: OPTIONS

Mark Sebastian Image Mark Sebastian Blogger and Contributor, OptionPit.com

Volatility is a trader’s friend, but with the VIX falling a record 39% last week, what’s a trader to do? Trader and blogger Mark Sebastian of OptionPit.com has a couple of plays for the current environment.

I was asked by several different media groups why the VIX was so low. After all, the VIX was just over 22% on December 28 (a 52-week high); one week later, it is trading at a 52-week low. Our answer was simple, the VIX is so low because it should be this low.

In the chart below, I point out when the VIX hit its peak on December 28, 2012 (the yellow circle). I also point out that IV was 'predictive' of the movement that we saw on Monday and Wednesday (also in Yellow), when the S&P futures rallied 75 points in two days.

chart
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Notice that prior to the big moves, 20-day realized volatility (a one-month measure) was in the toilet; it was below 10%. We can see the total lack of movement in the chart.