No fear: Here’s why the VIX has cratered

The CBOE Volatility Index has staged a stunning reversal over the past few weeks, falling by about half as the uncertainty and volatility surrounding the Brexit vote dissipated and the S&P 500 climbed to record highs.

Stacey Gilbert, head of derivatives strategy at Susquehanna Financial, believes that the VIX has fallen to nearly one-year lows given that the U.S. market looks favorable compared to most countries' equities.

"We're the area [of the globe] right now that probably has the best outlook in terms of an equity valuation perspective," she said Monday on CNBC's "Trading Nation." "That kind of keeps us range bound in the S&P and that's what the VIX is going to measure. It's going to measure the potential for moves in the S&P 500."

The VIX is computed from the prices of options on the S&P 500, and for that reason, technically predicts the amount of future volatility. Yet since options are more frequently used to hedge against downside than to speculate on upside, the VIX generally measures investor nervousness; hence its nickname, "the market fear index."

In recent weeks, as stocks have climbed and the Brexit-centric volatility has dissipated, options prices are now reflecting a reduced predilection toward hedging — as well as a general belief that volatility will remain low.

But some see a VIX bounce back in the offing.

"I believe that valuations are stretched, I believe that global growth is going to continue to decelerate far more than expectations and the dollar will strengthen; therefore the feedback loop is that the VIX will start to glide higher again," said Stifel Nicolaus portfolio manager Chad Morganlander.

He recommends that investors look into commodities like gold at this time. The precious metal has traditionally been seen as a safe haven for investors.

The VIX ended Tuesday at 11.97.


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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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