With global markets becoming increasingly nervous over a plethora of market-moving events, many investors are turning to a dauntingly familiar adversary: fear.
On Monday, the CBOE Volatility Index, or , surpassed 21 for the first time since February, igniting a sense of uncertainty in the market.
"The most volatile months historically are September and October, however we've seen sharp market moves in other periods," explained Mike Khouw on Monday's "Fast Money." "Right now Brexit and the Fed are the big near-term catalysts that could cause a volatility spike."
The president of Optimize Advisors added that, with the U.K.'s EU vote set to take place on the 23rd, VIX June options are moving irregularly. On Monday, the VIX was seeing more than double its average daily volume.
"Looking beyond the referendum, the most active option is the July 24 calls," explained Khouw, who saw 35,000 of the contracts traded Monday at an average price of $1.45. The movement translates to an expectation from buyers that the VIX will be above $24.45 by July expiration. For this call to be profitable, a significant spike in volatility would be seen this summer. "That would probably be accompanied by a bit of a downdraft in equities here and abroad," said Khouw. This move would put the VIX at a year-to-date high.
Khouw also noted that, generally speaking, the S&P and the VIX are typically "anticorrelated," which means they move in opposition of one another. Super spikes in the VIX are generally followed by sell-offs in the S&P 500. However, he explained that over the longer term, volatility is generally mean reverting. Thus if volatility is high, investors can generally expect that it will become less so. When volatility nears all-time lows, it will either linger there or rise.
Ultimately, Khouw believes the recent ongoing rise in the VIX indicates that many investors feel a swoon is coming.
