There is no shortage of things for traders to worry about right now.
A possible widening war in the Middle East. The potential for energy prices to explode higher. Some kind of international incident in the South China Sea. Election-related chaos in November and beyond. Not to mention a rebound in inflation, delayed Federal Reserve rate cuts, or the weakness we’re now seeing in some Magnificent Seven names.
But despite it all, volatility has remained relatively subdued. Just look at this week’s chart of the CBOE S&P Volatility Index (VIX). I used a three-year timeframe to provide some valuable perspective.
Volatility: What Would it Take to Get Markets REALLY Concerned?
Data by Ycharts
Yes, the VIX spiked late last week because investors knew some kind of Iranian attack was coming. Yes, we’re off the lows in the 12s we saw in Q1. But in the grand scheme of things, a 16-ish-VIX is nothing. Certainly not when compared to what we saw throughout much of 2022 or early 2023. Similar complacency can be seen in bond market measures like the high-yield spread.
As investors and traders, you can interpret and react to this in one of two ways...
- Markets are correctly pricing in the fact the potential risks out there aren’t as bad as ones we’ve faced in the past, despite a lot of fear-mongering, or
- Markets are too complacent, and it makes sense to buy some downside protection in the options market
I remain in the “Be Bold” camp longer term. But a little insurance goes a long way to granting peace of mind – and it (still) isn’t that expensive to buy. So if you need it to sleep at night, go for it.
