CBOE's Rhoads On How Low VIX Can Go

August 04, 2017

Russell RhoadsRussell Rhoads, CFA, is director of education for the CBOE Options Institute, which is part of CBOE Holdings, the parent company of ETF.com. He is the author of six market-related books and an adjunct instructor at Loyola University and the University of Illinois, Chicago.


ETF.com recently caught up with Rhoads to discuss the lack of volatility in the stock market and the record-low VIX, an index that measures implied volatility on S&P 500 options (also known as Wall Street's "fear gauge").

ETF.com: We’ve heard a lot about how low the CBOE Volatility Index (VIX) and volatility are, but could you put that in perspective? How rare is the period we’re going through right now?

Russell Rhoads: We're as low as we’ve been for the whole history we’ve had VIX, but the other rarity is how low the actual market volatility has been. This is the least volatile the market has been since the ’60s.

ETF.com: Why do you think the volatility is so low in the stock market?          

Rhoads: It's really perplexing. Part of me thinks there’s nowhere else for people to put money. You’d almost rather put money into a stock that pays a dividend than buy a bond right now for income.
Part of me also wonders if the huge flows into ETFs, which have been being distributed across a whole lot of names, have had something to do with the lack of market volatility as well.

Instead of it being a market of individual stocks, it’s more like the stock market is a single asset class that people are just putting money into. If that money gets spread out evenly, you’re just going to see a grinding higher in the stock market, with not a whole lot of realized volatility.

ETF.com: What’s even more surprising to me is that the stock market is unfazed by all this tumultuous news coming out of Washington, D.C., with the Trump administration and Congress. Does that surprise you?

Rhoads: It really does. Although, one of the early lessons in my career that’s turned out very well is that when the market sells off based on something the government is doing, it’s almost always a buying opportunity.

ETF.com: One volatility trade that's worked phenomenally this year is buying inverse VIX ETFs. Last I checked, they’ve doubled so far this year. Is that a trade that’ll keep working?

Rhoads: Not necessarily. If we get any kind of volatility event at all, those funds can give up 20% to 30% in a day.
Whenever we see flows into those ETFs, I start to get concerned about that sort of strategy, because it’s like picking up nickels in front of a steamroller. You’ve got a lot of people getting into them that’ve never experienced the steamroller.

ETF.com: The VIX briefly fell to a record-low 8.84 in July. Is a 7-handle possible? How low can it go?

Rhoads: Theoretically, VIX could go much lower, but based on history, the high 8’s may be considered an absolute floor. VIX is a function of realized volatility, and as I noted, this has been the least volatile market since the ’60s. I can’t imagine—even in the quietest of market scenarios—VIX going much lower.

ETF.com: Because volatility is so low, is now a good time to be an option buyer and a bad time to be an option seller, or is that too simplistic?

Rhoads: It’s too simplistic. But if you’re a portfolio manager and you’re looking to protect your portfolio between now and the end of the year―on a relative price basis when using implied volatility as the valuation metric―options are as cheap as they’ve been. That’s in a very basic sense how to think about low VIX.

Contact Sumit Roy at [email protected]


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