What is VIX?

There’s been a lot of talk about the low level of VIX lately.

Just this past week Zero Hedge commented on VIX saying, “As Nasdaq melts up faster than Bitcoin, perceived equity market risk has utterly collapsed.

VIX just hit 9.92 as NASDAQ hit 6,100 (note the most recent low is 9.39 from 12/15/06 and all-time low at 8.89 on 12/27/93)

What is VIX?

In a new book by Danielle DiMartino Booth, FED UP An Insider’s Take on Why the Federal Reserve is Bad for America, VIX is defined. Danielle DiMartino Booth is the founder of Money Strong, LLC, an economic consulting firm. She began her career in New York at Donaldson, Lufkin & Jenrette and Credit Suisse, where she worked fixed income and the public and private equity markets. After work­ing as a financial columnist at the Dallas Morning News, DiMartino Booth spent nine years as an adviser to Richard Fisher at the Federal Reserve Bank of Dallas. She lives in Dallas with her family.

“Securities brokers…devised an index to trade: the VIX”

 

vix_sp500_index

 

”Now a household word, this ticker symbol for the Chicago Board Options Exchange Volatility Index was created to show the market’s expectation of thirty-day volatility.

In practice, the VIX reflects the upper and lower bound of where investors perceive the S&P will trade over the next thirty days, gauging investors’ attitude toward near-term risk in the market. The lower the VIX, the less concerned investors are. When it gets to be too low, however, it begins to flash a different kind of danger, that of complacency.

The FED follows VIX. Booth said “The worry at the FED is that when investors become unafraid of risk, they start taking more of it, which could lead to trouble down the road.”

With VIX today at sub-11, investors appear to be very complacent.

There are so many trouble spots around the world that could blow up at any time, complacency doesn’t seem warranted. Here at home, Congress just authorized another $1 trillion on top of the $20 trillion we owe to avoid a government shutdown. Yellen is signaling two more interest rate hikes this year, and the interest on the Federal debt, just went over the highest ever, $550 billion for the year. How can we afford higher interest rates?

On 5/02 Zero Hedge noted that “And perhaps more interestingly, SKEW (the price of tail risk protection) has plunged to its lowest in 2017 this week (suggesting that – for once – investors are under-hedged for any extreme event)…

The question is – with VIX so low – have traders rotated even deeper into derivative wag-the-dog land by levering up with VIX options to bet on this “easy” market? And if so, does that compound the potential for 1987 waterfalls if (when) something breaks?

We hope this explains VIX. If you have any questions, please write us with your questions about VIX or any other economic topics.

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