Just When You Thought It Was Safe, China Strikes Again

The correlation between the VIX and the FXI

Aug 20, 2015 at 10:07 AM
facebook X logo linkedin

Just when you thought the waters were safe, China strikes again. Shocking, I know. 

As Matt Moran of the Chicago Board Options Exchange (CBOE) notes, implied volatility (IV) on the iShares FTSE/Xinhua China 25 Index ETF (FXI) has exploded (again) this week. We're certainly higher than the norm, but still a bit away from spike levels of a July.


Ten-day realized volatility (RV) in FXI is about 24 now, so mid-30s IV seems pretty reasonable, given the action over there. RV reached a high of 64 back on July 10, and remained super elevated for about a week before gradually dipping back into the teens. We're clearly way off the panic levels from back then.

An optimist could say, "That's a good sign, as we're starting to discount the China market implosion a bit." A pessimist could say, "OMG, what if the vol gets back up to July levels? Sell everything! Ask questions later."

For 99.9% of us, it's more important how this all impacts our markets. We didn't rally exponentially with China back in the spring. Rather, we were busy worrying if Greece was going to blow up the eurozone and tank the world economy. Now we've turned the channel to the China Network.

It's kind of instructive to see how the CBOE Volatility Index (VIX) looks vs. FXI vol:


Before April, the vol indices moved in lockstep. Then China vol spiked and we pretty much ignored until June. At that point, FXI really spiked, and we started following it pretty much tick for tick. And we are still following. Here's how that same chart looks when I start it three months ago:


Yes, our options literally move tick for tick now with FXI options. 

This won't all end with China settling down. It's just not happening overnight -- I mean, they might rally overnight, but it's likely their shakeout persists. It's only going to end here when we decide Chinese economic contraction is discounted here. 

We could, theoretically, then rally … But who am I kidding? In 2015, all that means is that we started obsessing over some other burgeoning economic disaster. 

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


Target Effortless Triple-Digit Gains Every Sunday Evening For Life!

This is your chance to triple your profit potential on Sunday evenings, without spending all your free time watching the market.

On Sundays, as a Weekend Plus subscriber, you’ll get up to 6 trades every Sunday, each targeting gains of 200% or more.

Start targeting gains like the ones our subscribers have seen recently, including:

213.3% GAIN on AutoNation calls
100.0% GAIN on Monster Beverage calls
100.4% GAIN on Walgreens Boots Alliance puts
100.4% GAIN on ON Semiconductor calls
257.7% GAIN on Dell calls

101.0% GAIN on Apollo Global Management calls
103.6% GAIN on JP Morgan  Chase calls
105.3% GAIN on DraftKings calls
101.3% GAIN on Airbnb calls
203.0% GAIN on Shopify calls
102.0% GAIN on Cboe Global Markets calls
100.9% GAIN on Boeing calls
102.1% GAIN on Microsoft puts
102.3% GAIN on First Solar calls
101.5% GAIN on PulteGroup calls
101.0% GAIN on Apple calls
209.4% GAIN on NXP Semiconductors calls
100.8% GAIN on Uber Technologies calls
100.4% GAIN on Academy Sports and Outdoors puts
102.2% GAIN on Trade Desk calls
100.8% GAIN on DoorDash calls
100.0% GAIN on Camping World Holdings puts
100.0% GAIN on Cboe Global Markets calls
100.2% GAIN on C3.ai calls
238.5% GAIN on Oracle calls



Rainmaker Ads CGI