VIX Indicating a Pullback Before Year-End: Strategist

The CBOE Volatility Index (VIX), considered the measure for fear in the market, is close to falling below 20, the first time since late August of last year.

What is the impact of the VIX at such levels and how should investors play it? Dan Deming, trader at Stutland Equities, and Scott Fullman, director of derivatives investment strategy at WJB Capital Group, shared their advice.

“It’s a sign not so much of complacency, but supply and demand,” Deming told CNBC.

“The VIX is showing signs that the market is calming down.”

Based on put buyers, Deming said there are a lot of people who believe that the VIX is going to continue to be under pressure through the winter.

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In the meantime, Fullman said the low VIX is an opportunity for traders and investors.

They can either take some risk off the table by moving from long stock positions into long calls on stocks in groups where volatility levels are low, or look at hedging positions by purchasing puts against stocks, to help provide cushion in the event of a market correction.

With the level of the VIX so low, the implied volatility is low in general on stocks. Fullman said now would be the time to buy protection because there's perceived volatility ahead further out in time.

CNBC Data Pages:

“What’s an interesting point is to look at the time skew on the VIX itself,” he said.

“As we go out further in time, the risk perception is rising a little bit, which indicates that we’ll see a little bit of a pullback before the year end. It may not be a major correction, but just enough to raise concerns out there that people will be buying volatility.”

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No immediate information was available for Deming or Fullman.