We saw all these things drop off, and yet a relatively small spike in the VIX.
If you look right at the start of December, you see the huge gap up and the period of higher trading days.
But nothing like that today.
Usually, on a day where the market dropped off like this, we’d expect a big gap up like we saw back then.
Remember, VIX started out as an index to measure the market’s anticipated volatility -- as I understand it derived from options pricing.
Now, people tend to buy puts as protection when the market is going down -- usually buying too late.
That buying ramps up the premium and anticipated Implied Volatility in the pricing which causes VIX to rise through some complicated math.
Due to the number of short VIX products and the popularity of selling VIX pops, this has gotten a little more skewed in recent years.
2020, if I recall, hit an all-time high or dang close to it.
But, having said that, with today being a 70 point drop in SPX and one of the bigger drop days we have seen lately, the VIX is just not reacting with a pop consistent with the drop, meaning that the put buying participation is not high, and the market is not protecting from a further drop.
Said another way: participants are not expecting a bigger drop through buying puts.
VIX’s lackluster excitement says to me that this was expected and we are not looking for a bigger drop at the moment.
Of course, the market changes every day, so we’ll see what tomorrow holds.
Jeffry Turnmire and InvestPub do not provide investment advice. Trading involves a substantial risk of loss and is not suitable for all investors. Many traders fail and you should not trade with money you cannot afford to lose. If you need personal financial advice, consult a financial advisor.
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