Papale on the VIX

By Steve Papale

Enough already. Maybe passing the ball at the end of the Super Bowl was a bad call. Maybe they should have handed it off the Lynch. Of course, had the catch been made I doubt people would be second guessing. I doubt we would be hearing “even though he made the catch and the Seahawks won the Super Bowl what were they thinking calling a pass? Worst call in history”. No way. Bad result for the Seahawks – you bet. But calls are made based on statistics and matchups. They coaches said they had what they wanted. I also heard they wanted to showcase Wilson on that play and not Lynch. Maybe. Maybe not. Either way. Let’s move on. I have an underperforming Bulls team to focus on.

I am more a casual observer of the VIX than a trader of it. I use it as a barometer of market sentiment and watch its overall level. I also compare the current level to where it has been trading over the last year (no more than that) to get a sense of the relative expensiveness of options today. If you have trading options for even a short time, you probably know that implied volatility rises and hence the VIX as well, when the demand for options goes up. That typically occurs when fear enters the market as result of a market selloff. People demand insurance, which is what options are, to protect themselves against a falling stock market.

With the market rallying today (Thursday) we are seeing both the VIX cash and the VIX futures down. No surprise there. What may be worth noting is the cash is trading around 16.75 and the Feb future around 18.55, or about a 10% premium to cash. This is telegraphing the markets expectation of a rise in VIX between now and when the futures expire (in 13 days). A rise in VIX occurs when markets selloff. So the VIX market may be hinting that is looking for a market selloff over the next couple of weeks. Of course the futures could fall to the level of the current cash market. But some interesting information nonetheless. As always, proceed with care.

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