By Sarah Morgan
For investors, yesterday brought a double dose of good cheer: Not only did the Dow finish up 330 points, but the Chicago Board Options Exchange Market Volatility Index — more commonly known as the VIX or the “fear index” — fell more than 8%. Does that mean the worst of the market turbulence is over?
Not quite. To get a clear picture of where the stock market sees volatility headed, investors should compare the VIX, which measure investor anxiety, to its futures, says Timothy Strauts, an exchange-traded fund analysts for researcher Morningstar Inc. The “spot VIX” — the number that’s quoted in the news – is based on the current prices for options on the Standard & Poor’s 500-stock index; the cost of options rises as the stock market becomes more volatile. In other words, it’s best to think of the VIX as a snapshot of what’s happening in the here and now, Strauts says.
On the other hand, VIX futures allow traders to bet on where they believe the index will be in a month or several months from now. Comparing the current spot VIX to VIX futures, says Strauts, shows whether traders expect stocks to be more or less volatile a month from now than they are today.
Unfortunately, while the VIX has fallen to 33, it’s still very high by historical standards. And VIX futures are hovering in a range between 32 and 34 — meaning traders are expecting volatility to stay about as high as it is now for at least the next several months, says Strauts.
The silver lining for investors: The fear index could be a lot higher. In 2008, for example, the VIX set new records as it rose above 80 during the financial crisis and market crash. The current level suggests that traders “are expecting high volatility, just not 2008 crisis volatility,” Strauts says.