In Focus: VIX Volatility Back to Pre-Crash Levels

March 15th, 2012 by

The clever folks over at the Chicago Board Options Exchange (CBOE) announced today that they have come up with a brand new derivative product – the VIX of the VIX – that will allow investors and traders to take positions on what they expect the volatility of the CBOE’s Volatility Index, aka the VIX, to be over the coming weeks and months.

It will be particularly interesting to monitor that measurement now, as the VIX itself – as shown by the chart below – has fallen to 15.3, below the average level recorded during the pre-crisis years of 2003 to 2008.

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The VIX measures the market’s outlook for volatility in the Standard & Poor’s 500-stock index. In recent years, it has earned the moniker of the market’s “fear index” or “fear gauge”, soaring to an astonishing 80 during the height of the crisis and then to hover in the 30s off and on in the years since, during which it has averaged a reading of around 20.

Relatively reassuring US economic data has helped propel the S&P 500 to its highest levels since the crash. If investors are confident enough to push stocks that much higher, it’s not likely that they’ll be anxious; hence the low volatility levels. But now traders and investors will have one more data point to scrutinize: perhaps early fears that the market rally will stumble will be reflected first in this new indicator? For now, at least, the low VIX readings seem to be confirmed by the degree of investor aversion to other “safe haven”, low risk asset classes, such as US Treasury securities.

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