The VIX of the VIX

12/22/2014 12:01 am EST


Jim Jubak

Founder and Editor,

MoneyShow's Jim Jubak takes a look at the low volatility, on average, of 2014, but also the huge spikes of volatility, and what it all may mean moving into the new year.

The historic average for the (VIX) is about 20 and a smidge. Now, the VIX is known as the Fear Index. It's the Chicago Options Exchange Volatility Index. It measures trading in options on the S&P 500 and, basically, what it is, is a measure of seeing how anxious, what prices people will pay for insurance on the S&P because they think the S&P is going to be really, really volatile, so the higher the VIX, the more fear there is in the market and, as I said, the average is somewhere a little over 20.

2014, on average, has been extraordinarily low volatility, extraordinary lack of fear. We've had days when the VIX has been around 11. For the average for the year, we've traded at about 25% below the historic average. Again, you can argue complacency, you can argue that there really isn't very much fear in this market and you shouldn't be but the VIX has been really low on average.

What we've had, however, is extraordinary moves in the VIX within that average in very short periods of time so, for example, the huge move in oil prices lower and the turmoil that that's put in the market has raised the VIX only to about, well, a little less than 21 as of October 16 so still very close to the average but that average disguises the fact that from the low to the high, from the low around 14 or so to the high, we're looking at roughly an 80% increase in VIX volatility. What we're getting is low volatility on average but these huge spikes and that's led some people to look at something that they call the volatility, the VIX of the VIX, the volatility of the volatility, how quickly the volatility of the market shifts because that's a sign that there's lots of stuff going on underneath the surface.

It may not be reflected in the averages but you're getting these really abrupt moves in the very short-term. That measure, the volatility of the volatility, the VIX of the VIX, seems to be increasing this year. We're getting more of these very short periods of moves in one direction or another. In the late summer/early fall, we got the VIX moving up by about 40% and then it went way back down, retraced that whole 40%, and now back up again so what we're seeing is these big shifts that are disguised by the average so you can say, well, the market is safe, low volatility, complacent, whatever, but what we're seeing is very big moves on short periods of time and that, to me, argues that, at some point, the average starts to reflect that and we're going to see that this market is really not, indeed, as low volatility and as complacent about risk as the average would seem to suggest.

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