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Summary

  • The CBOE Volatility Index just posted the lowest monthly close since January 2007. In that year the VIX steadily rose but the market didn't peak until late 2007.
  • The VIX can and has gone down to low levels such as this and can stay there for some time (as seen in 2003 to 2007).
  • There is a concern that this shows dangerous complacency among option traders -- but there are several somewhat understandable factors as to why the VIX is at such lows.

Option implied volatility continues to stay low with the S&P 500 (SPX) (NYSEARCA:SPY) hitting new all-time highs recently (and downside volatility in the Nasdaq lessening greatly) - other factors involved in the dropping CBOE Volatility Index (VIX) (NYSEARCA:VXX) include seasonality (many traders are on vacation this time of year and trading volume tends to slow up), the recent narrow overall range in the broad market and the rather slow creep to new highs.

But the bottom line is that the VIX just posted the lowest monthly close since January 2007 (option volatility increased steadily throughout 2007 after that, while the market didn't top out until very late in 2007 - the VIX of course spiked to over 80 in 2008 during the height of the financial crisis). However, as you can see on the long-term chart below, the VIX can and has gone down to levels in the 10 area bottom, and can stay there for some time - 2003 to 2007 was one of those declining VIX periods with many lows in the 10 area.

VIX Monthly Chart
(click to enlarge)

Chart from TradeStation

It does show a bit complacency among option traders that the VIX is so low - not many are rushing out to buy option premium (such as put protection premium) - but it is not necessarily a contrarian sort of guarantee that stocks are destined to fall soon.

Another way to look at this reading is that the VIX at 11 is saying that SPX options are pricing that the S&P 500 could go up or down 11% looking out to 52 weeks from today … which seems low from a common sense perspective, given that we had 20% plus net moves in both 2012 and 2013 and we've seen volatility in both directions in 2014.

It's definitely an important factor to watch in the markets going forward and could be a concern … but with some major indices at all-time highs, "let the tape/chart tell the tale" is an overriding rule in my analysis.

Source: Lowest Monthly VIX Close Since January 2007