The CBOE Volatility Index (VIX) estimates expected volatility by aggregating the weighted prices of S&P 500 Index (SPX) puts and calls over a wide range of strike prices. Specifically, the prices used to calculate VIX Index values are midpoints of real-time SPX option bid/ask price quotations.
CBOE Volatility Index (VIX) has averaged 33 this year with a low of 12 and high of 83.69, the highest implied volatility has ever been.
The VIX futures curve is in contango about 80% of the time and normally goes into backwardation in stressed markets.
VIX is a gauge of expected future volatility and VVIX is the vol of VIX. Both suggest a lower future vol. We’ll see.
The VVIX is drifting down relative to VIX the past five days.
Forecasts of volatility for stocks are valuable for investors as a measure of traders’ uncertainty about a stock or index price. With VIX we can quickly gauge the future expectation for volatility priced by options. If it’s a “fear gauge”, it’s indicating less fear.
The CBOE Index Put/Call Ratio is back to its long term average. I believe index options are mostly traded by fund managers for hedging.
The CBOE Index Put/Call Ratio is just under its one year average. It was about 0.70 before the March waterfall decline.
CBOE Equity Put/Call Ratio is trending toward the low level was saw before the waterfall decline in March. A falling put-call ratio, or a ratio less than 1, means that traders are buying fewer puts than calls. It suggests that bullish sentiment is building in the market.
CBOE Equity Put/Call Ratio drifting down to 0.50 may be an early warning sign the market is becoming complacent.
Since I believe index options are mostly used by money managers for hedging, I consider its level around average to be normal. But I believe equity options are traded more by speculators, so it may be the earlier gauge of a shift in sentiment.
I was talking volatility trading with someone recently when it occurred to me I was learning Lotus 1-2-3 for advanced accounting in the 90s when I first started exploring volatility and VIX indexes. So, I’ve been observing the volatility profile a long time.
I wouldn’t be surprised to see another volatility expansion before we see implied volatility back down dow 20 or lower.
Another useful way I like to illustrate the volatility contractions and expansions to clients is a volatility channel. In the chart I used two standard deviations from the 20 day moving average around the S&P 500 price trend to show an upside breakout known as Bollinger Bands. The chart below is is the width of the bands, which is a good illustration of the volatility expansion and contraction the past two months.
Periods of volatility contractions are eventually followed by volatility expansions.
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