Has Volatility Been Permanently Subdued? Unraveling the Mysteries Behind VIX’s Low Levels

In the world of finance, veterans often rely on the Cboe Volatility Index (VIX) to gauge the market’s anticipation of volatility over the next 30 days. However, a curious scenario has emerged as VIX languishes in the 12-13 range despite historical precedents of higher levels during periods of investor optimism. This prompts us to explore the question: Has volatility been permanently subdued, or are there underlying factors at play that might suggest a different narrative?

The Nature of VIX: More Than Just a Fear Gauge

It’s crucial to dispel the notion that VIX is a direct measure of fear. While there is a correlation between fear and VIX, the index primarily reflects the market’s best estimate of volatility. Traders, influenced by recency bias, often anticipate ongoing market conditions. However, recent developments introduce other dynamics into the equation.

One noteworthy aspect is the composition of VIX, which considers all S&P 500 options, both puts and calls, with 23-37 days to expiration and bids of a penny or more. If implied volatilities of calls are low, this affects VIX. Recent trends reveal a surge in ETFs employing strategies involving the selling of volatility, such as JEPI, XYLD, QYLD, PBP, and others. Though these ETFs commonly use the relatively benign strategy of writing covered calls, the sheer volume of these calls entering the market impacts prices, contributing to the dampening of implied volatilities.

Correlation of Components within Indices

Another influential factor is the correlation among stocks within the S&P 500. High correlations result in increased index volatilities, while low correlations have a dampening effect. To illustrate, imagine a two-stock index where one stock rises while the other falls by a similar amount—the overall index remains relatively stable. However, if the stocks move in sync, the index will reflect substantial volatility. This correlation, or lack thereof, significantly influences the movement of the index.

“Socially Acceptable Volatility” and Asymmetry in VIX Response

While volatility calculations don’t account for the direction of stock or index movement, investors certainly do. The concept of “socially acceptable volatility” underscores the preference for upward market trends. Investors are generally uneasy when markets decline, prompting them to seek volatility protection, subsequently boosting VIX. This asymmetry in response to up and down moves is a fundamental characteristic of VIX.

Analyzing the Data: VIX vs. COR1M

Has Volatility Been Permanently Subdued? Unraveling the Mysteries Behind VIX's Low Levels
1-Year Line Chart, VIX (red) vs. COR1M (white)

Turning our attention to the Cboe’s 1-Month Implied Correlation Index (COR1M), a crucial consideration arises. The correlation between VIX and COR1M is traditionally solid, yet recent data reveals an anomaly. Despite historical correlation patterns, the current data point stands near the lowest levels observed in the past two years. This raises a critical question: Are traders too complacent at present, or is the depressed VIX level justified given the correlation of its components?

Has Volatility Been Permanently Subdued? Unraveling the Mysteries Behind VIX's Low Levels
Regression Analysis, 2 Years, with COR1M as the Dependent Variable and VIX as the Independent Variable

Conclusion: Unraveling the Puzzle

In conclusion, the prevailing low levels of VIX may be indicative of a market that is seemingly complacent. However, it is crucial to consider the complex interplay of factors such as ETF strategies, stock correlations, and the human tendency to favor upward market movements. The current disparity between VIX and COR1M suggests that mechanical selling by ETFs could be a contributing factor to the subdued volatility levels.

As financial professionals, it’s essential to approach the market with a nuanced understanding, recognizing that volatility is influenced by a myriad of factors. While the current environment may appear calm, the intricate dance of market forces may hold surprises, reminding us that in the ever-evolving world of finance, permanence is a rare commodity. As we navigate these uncertain waters, a watchful eye on VIX and its correlations will undoubtedly provide valuable insights into the market’s future trajectory.

Author:Com21.com,This article is an original creation by Com21.com. If you wish to repost or share, please include an attribution to the source and provide a link to the original article.Post Link:https://www.com21.com/has-volatility-been-permanently-subdued-unraveling-the-mysteries-behind-vixs-low-levels.html

Like (0)
Previous November 23, 2023 10:57 pm
Next November 29, 2023 2:37 pm

Related Posts

  • Managing the Intangible Asset: A Deep Dive into Volatility as an Asset Class

    Most of us perceive assets as tangibles – stocks, real estate, commodities – or intangibles that carry definitive value like bonds or other fixed-income products. However, there’s one asset class that often goes unnoticed or is not optimally managed – volatility. Until recently, even I, during my tenure as an options market maker, didn’t truly regard volatility as an asset class. Although it was integral to our myriad calculations, I viewed it as an external input affecting the values of equities, futures, and options we traded. The shift in my…

    July 13, 2023
    0
  • Navigating Economic Uncertainty: 9 Strategies to Hedge Against US Recession Risk

    Introduction Economic recessions are inevitable and can have a significant impact on investors’ portfolios. However, it’s possible to prepare for and hedge against recession risks. This article will explore various strategies to protect your investments during a downturn and potentially even profit from it. 9 Strategies to Hedge Against US Recession Risk Diversification: One of the most effective ways to hedge against recession risk is to diversify your investment portfolio. This means investing in a variety of asset classes, including stocks, bonds, real estate, and commodities. A well-diversified portfolio can…

    April 5, 2023
    0
  • Navigating Uncertainty: Harnessing Market Volatility through Options Strategy

    As the adage goes, the only certainty in life is uncertainty. This has been brought to stark relief in recent events that have caught the world by surprise. To many investors, these events have highlighted the fact that we live in an increasingly unpredictable world, where seemingly unlikely scenarios can become reality, with potentially significant consequences for the global economy and financial markets. Consider the recent event where the mercenary Wagner Group seemed to be on the verge of staging a revolt against Vladimir Putin, one of the world’s most…

    July 3, 2023
    0
  • Navigating Market Uncertainty: A Close Watch on Inflation Data and Earnings News

    As we kick off the week following the July 4th holiday break, the financial markets seem to be settling into an uncertain rhythm. The high-profile nature of the mega-cap stocks is likely to dictate the market’s mood, following the noticeable weak finish on Friday. However, the broader market appears to be stuck in neutral as it remains on the fence. At present, the S&P 500 futures are down by three points, roughly in-line with their fair value. Meanwhile, the Nasdaq 100 futures have fallen by 27 points, trading 0.2% below…

    July 10, 2023
    0
  • Steady Sailing in Stormy Markets: A Pragmatic Approach to Investing Amid Global Uncertainty

    In a world where uncertainty is a constant, investors often find themselves faced with a significant challenge: How to navigate the unpredictable waves of the global economy? As an economist and politician, I understand the interplay of these forces and their impact on financial markets. The first step to successful investing in an uncertain world is accepting the inherent unpredictability of global events. Whether it is political instability, an unexpected economic downturn, or even a global health crisis, these events can significantly impact markets. However, investors often overlook these uncertainties,…

    June 29, 2023
    0
  • Riding the Yield Curve: How Treasury Bonds Signal Economic Optimism Amid Uncertainty

    As we enter the latter half of the year, government-bond yields have shown a discernible climb during the second quarter, fuelled by signals of robust economic vitality and a lessening of distress within the banking sector. Investors predict that these yields could continue their upward trajectory in the months to come. In the opening months of the quarter, bonds were rallying as investors grappled with a series of swift banking collapses, sparking fears of a wider crisis that could impede the flow of money and credit to households and businesses….

    July 1, 2023
    0
  • Investing in Turbulent Times: A Strategic Approach to Market Uncertainty

    Introduction In today’s increasingly interconnected world, global events can significantly impact financial markets. As world leaders work to navigate a delicate situation in the Middle East, investors face a challenging environment marked by uncertainty. The recent geopolitical tensions, threats, and the ever-present question of war make it essential for investors to approach the market with caution and strategic thinking. In this blog post, we will explore how to navigate these uncertain times and offer some ideas for investors to consider. The Uncertainty of the S&P 500 The S&P 500 index,…

    October 20, 2023
    0
  • Understanding the Significance of a VIX Futures Backwardation and the Normalizing Yield Curve for Investors

    Introduction In the world of finance, keeping a close eye on various indicators is crucial for investors. Recently, two significant developments have captured the attention of the financial community: the VIX futures slipping into backwardation and the gradual normalization of the US Treasury yield curve, particularly the 2-10 portion. Both of these developments have important implications for investors. In this blog post, we’ll delve into the reasons behind these occurrences and why they matter to investors. Understanding VIX Futures Backwardation Before we dive into VIX futures backwardation, it’s important to…

    October 20, 2023
    0
  • Market Oscillation: Navigating Uncertainty Amid Conflicting Signals and Interest Rate Concerns

    Overview The stock market exhibited a startling pattern this past week, reflecting mixed emotions and an ambiguous outlook for investors. A promising uptrend on Friday following Amazon.com’s earnings report and July’s employment statistics suddenly took a downturn as the market faced a sell program. The broader market went into turmoil, sealing a losing week for major indices. As a new week unfolds, the market seems to be on a rebound effort, yet buyers are still showing signs of reserve. Friday’s Fluctuations Friday saw a nice bid in the stock market,…

    August 7, 2023
    0
  • Seasonal Shifts: Are We on the Cusp of a Volatility Surge?

    Navigating the stock market is akin to sailing the unpredictable seas. While sometimes the water is calm, at other times, it can be incredibly tumultuous. Just as every sailor has his trusted weather report and tools, we as investors must rely on data, trends, and patterns to gauge what’s coming our way. Recently, one crucial measure of the stock market’s sentiment has caught our attention: volatility. But are we on the brink of a massive breakout in volatility? The Current Calm For starters, implied volatility, which is derived from option…

    August 30, 2023
    0

Leave a Reply

Your email address will not be published. Required fields are marked *