VIX Surges as Egypt Boosts Stock Volatility Worries
A key measure of stock volatility swung sharply higher on Friday as the market sold off broadly on the civil unrest in Egypt.
TheCBOE Volatility Index—which measures the market’s expectations for near-term volatility as reflected in S&P 500stock index option prices—rose more than 24 percent to just above 20.
The last time the VIX soared 20 percent or more was on June 4, in the wake of the "flash crash" last May, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. The volatility index soared 20 percent or more three times that month, Detrick said.
"The VIX is telling us there are major concerns in the short term," he said.
Still, the VIX, as it's known, is just at about 19.5, which remains below its historical average of just under 21. Analysts point out that the index is a "mean reverting" indicator, meaning it is likely to return to its historical average before long.
The sharp move higher on Friday may reflect investor fears that the market will continue to fall, so investors are buying protection for their portfolios.
"Putting in some type of insurance on your portfolios is really prudent given the current environment in the marketplace."
In fact, some market pros have recommended investors do just that as both the Dow Jones Industrial Average and the S&P 500 bump up against psychologically important thresholds. The Dow traded above 12,000 during the week, and the S&P traded above 1,300, levels these indexes haven't seen since the summer of 2008.
"Putting in some type of insurance on your portfolios is really prudent given the current environment in the market place," Dan Deming, managing director at Stutland Volatility Group, told CNBC earlier Friday.
While Friday's move was significant, Randy Frederick, head of trading and derivatives at Charles Schwab, says a few other market indicators pointed to the likelihood the VIX could fall again in the next few days.
One indicator is that prices of "puts" and "calls" on the VIX are in balance, Frederick says. A "put" is an option to sell a security, while a "call" is an option to buy. If market participants thought the VIX were to rise more, prices of puts would fall, he says.
Also, VIX futures that expire in two weeks are forecasting a VIX of 18.73; adjusted for the risk premium built into futures, the VIX would be at 17.60, Frederick says, far below today's levels.
"Clearly there is unrest today, but these....indicators are saying that the VIX is overreacting," he said.