The CBOE Volatility Index (VIX), a measure of the cost of buying protection on the S&P 500, is down about 10 percent this afternoon. It is unusual for the VIX to drop 10 percent in a day (this is the lowest level since April and nearly the lowest level in three years), but it is particularly unusual for it to be down so much on a day when the markets are flat.
What's up? There may be a seasonality factor, but one volatility trader gave me the most obvious answer: "My clients are just not interested in buying protection," he says. This is odd, since protection is now very cheap and there are still plenty of worries out there, but it is the obvious explanation.
Two other points:
1) while the VIX is down 10 percent, VIX Futures are down only 1.2 percent; those futures expire next Wednesday.
2) market watcher Doug Kass responded to my comments on the VIX with this note: "The VIX is somewhat broken. There are too many other ways to play volatility and market downside outside of SPY puts. There are more than a dozen volatility ETNs, weekly options, leveraged ETFs, inverse ETFs, and options on most of these, so in the end I wouldn't make too much of it."
This is a good point. I have had a problem using the VIX for a while. In the old days (10 years ago), extreme downside readings like we see today would usually indicate at least a short term market top, but that hasn't been particularly accurate for a while. Maybe Doug is right.
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