As the VIX Goes, So Goes the Options Market

Dedicated followers of the CBOE Volatility Index [VIX] must be exhausted right now. The index finished the month of April hovering near 21. As of this writing, the VIX is hovering around 23. A gain of roughly 10% in only three months certainly appears impressive to the casual observer.

However, those final numbers only reveal a small part of this capricious index's recent story. Over the past few months, the VIX has plummeted to a low of 16.30 and surged to a high of 28.54 before finally settling at its current level. (For a recent look back at the VIX, take a look at "VIX Weekly Activity Review," For a more distant look at the VIX, review "Is The VIX Finally Here to Stay" & "The Capricious VIX').

These radical fluctuations are reflected in the implied volatility level of VIX options (I realize that the concept of volatility levels within a volatility index is somewhat abstract, but bear with me.)  ATM VIX options volatility is currently trading around 73. That is extraordinarily high and clearly indicates VIX options traders expect a rough road ahead. However, that is also well below the 110 ATM volatility level that was reached a few weeks ago. Is the worst behind us? Apparently it is...for the moment....

The rampant fluctuations in the index and in the broad market have once again driven investors into the option pits. It is no coincidence that July 15 (the day the VIX hit 28.54) was also the busiest day in the history of the options market. (See "The Perfect Options Storm" for more information.)

An incredible amount of options volume has changed hands in recent weeks. In fact, this surge in volume has propelled the options market past the 2 billion contract mark faster than ever before.

The options market first surpassed the 2 billion contract level in late December 2006. In the following year, the dramatic surge in volume allowed the options industry to surpass the 2 billion contract mark by September 25.

The options market hit the 2 billion contract mark on July 22 this year. That is over two months faster than 2007 and five months faster than 2006. It's a phenomenal amount of contract volume for such a short period of time. It also emphasizes just how important volatility is to the overall health of the options industry. To paraphrase an old adage, as the VIX goes, so goes the options market...

Stock Position: None.