Volatility Signals Growing Investor Concern, But No Panic

June 28, 2016

Stocks go down, volatility goes up. That's a pattern we've seen time and time again in the financial markets, and this time is no different following the Brexit shocker last week.

As the S&P 500 tanked 3.6% on Friday, the CBOE Volatility Index (VIX) shot up nearly 50% to 26―a four-month high. Similarly, the Bats-T3 SPY Volatility Index (SPYIX) jumped 44% to around 25.

At those levels, both volatility indexes nearly doubled from their lows of 13 from earlier in the month.

Year-to-Date VIX (Blue) & SPYIX (Orange) Through Friday

 

Implied Volatility: The Market's Fear Gauge

The VIX is widely considered the stock market's "fear gauge," because it rises when traders and investors are willing to pay more to hedge their positions.

The CBOE index attempts to measure volatility based on the pricing of S&P 500 stock index options. When investors are willing to pay more for options, they expect larger moves in the market (and vice versa). This is called "implied volatility."

Meanwhile, up-and-coming SPYIX measures implied volatility based on the pricing of options on the SPDR S&P 500 (SPY | A-97), the ETF that tracks the S&P 500.

SPYIX was launched this year as a competitor to VIX, and reflects the growing importance of ETFs in the options markets. SPYIX is calculated by T3 Index and Bats Global Markets, which owns ETF.com.

Investors Concerned, But Not Panicking

Current levels in the volatility indexes reflect investors' understandable concern following Brexit. How the situation impacts the global economy is highly uncertain, with some analysts sounding dire warnings and others suggesting the event won't have much of an impact at all.

At levels in the mid-20s, the VIX and SPYIX reflect modest levels of investor worry, but it would take a spike above 30 before these indexes signal panic among investors.

Since last August, there have been two major corrections in the U.S. stock market, and each saw implied volatility spike to more than 30 at one point. In the August 2015 sell-off, the VIX topped 53; in the swoon from January of this year, the VIX surpassed 32.

VIX (Since 2014)

If the current drop in the S&P 500 grows into something bigger, expect the "fear gauge" to spike more from here.

 

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