Q2 STOCKS TO BUY

Has the 'Runaway VIX' Finally Peaked?

Analyzing recent and historical VIX action to determine whether the market's most closely watched volatility gauge has finally peaked

Editor-in-Chief
Feb 1, 2016 at 9:53 AM
facebook X logo linkedin


The following is a reprint of the market commentary from the February 2016 edition of The Option Advisor, published on January 21. For more information or to subscribe to The Option Advisor, click here.

"History does not repeat itself, but it does rhyme," goes the famous Mark Twain quote -- and up until very recently, action in the CBOE Volatility Index (VIX) was looking like a very tightly crafted couplet. In December, the VIX notched a big pop above 25, but cooled to a low of 14 and change by Christmas Eve. Then, by New Year's Eve, a major VIX surge that would stretch into January had commenced.

The above sequence of events applies to the VIX of both December 2014 and December 2015, per the chart below -- but, as of very recently, the eerie symmetry between the VIX of now and the VIX of a year ago has been broken.

OA VIX daily price

Back in January 2015, VIX peaked only as high as 23.43 by mid-month, a shade below its December 2014 high at 25.20. After that, the "fear index" staged another run higher from late January into early February, but that pop carried VIX only as high as 22.81 on Feb. 2. After that wild start to the year, VIX cooled its heels until well into the summer.

In 2016, however, it's been hard to miss the "runaway VIX" theme underpinning the headlines about the stock market's steep losses. By Jan. 8, the index had already surpassed its mid-December 2015 high, and has gone on to set new year-to-date highs in three subsequent sessions so far -- the most recent of which (32.09 this past Wednesday, Jan. 20) marked VIX's loftiest intraday level since Sept. 1. So, while the index was already embarking on a series of lower highs by this time last year, it appears VIX is still attempting to find its early 2016 ceiling.

Notably, the two most recent VIX spikes (Jan. 15 and Jan. 20) were also heavy days for VIX option volume, with trading activity rising to levels that have, in the recent past, coincided with short-term VIX tops. Of course, some of the heavy volume on Jan. 20 may have been related to the expiration of January-dated VIX futures options, as many traders were likely rolling into February and March options.

OA VIX volume

Interestingly, the January VIX settlement was its highest since November 2011, when the index was coming down from a major August-October volatility explosion. The print of 27.40 left massive open interest accumulations at the VIX 28, 29, and 30 call strikes to expire worthless -- though only 57% of January VIX call options expired worthless, compared to a more typical 90%-plus. With an unusually healthy portion of VIX call buyers vindicated by this month's expiration, we could see some renewed interest in VIX calls during the days and weeks ahead.

And where does VIX go from here? With its latest surges, the VIX has already twice settled above 26.65, which marks the half-high of its August 2015 intraday peak at 53.29. In other words, the volatility gauge has a long way to go still before it comes close to approaching those August highs -- which has been a point of anecdotal concern among some traders, as it appears to indicate a relative lack of fear amid the recent sell-off.

To put this in perspective, let's recall that the S&P 500 Index (SPX) lost 240 points, or more than 11% of its value, over the course of just five trading days back in August. Meanwhile, from its close at 2,078.36 on Dec. 29 -- what could reasonably be described as the start of this sell-off -- through its Jan. 20 close, the S&P was down 219 points, or 10.5%. In other words, it's taken the S&P nearly three times as long (14 trading days) to finally approximate the magnitude of its August decline, making this latest slide a more "orderly" decline -- which, somewhat predictably, has had a more muted effect on the VIX than August's rapid-fire plummet.

So for those watching the VIX in hopes of timing an ideal entry point for a short-term swing higher in stocks, it's worth focusing on the areas that coincide with double the index's fourth-quarter lows. A VIX close below 27.34 (double the 4Q closing low of 13.67), and/or a move below 25.60 (double the 4Q intraday low of 12.80) would be a potential indication that the January VIX highs are behind us, at least for the time being.

And as further evidence of a near-term VIX peak being in place, look for a move below the 23-24 area -- which represents double the 2015 lows, and is also below some of the heavier call strikes in the February series, with your bet being that a large majority of VIX calls will expire worthless on the morning of Feb. 17.

 
 

“Buy This Stock Now!” - Expert Who Called 11x On TSLA

He called a rare 11x on Tesla…

But now, thanks to Elon & Trump’s new alliance…

He says there’s a new opportunity that could be 1,000x BIGGER than Tesla – and it could completely revolutionize a $23 Trillion market.

It’s trading for less than $5 per share right now…

But it won’t be under the radar for long.

Discover The 1,000x Bigger Elon Opportunity Here

GRAND SLAM COUNTDOWN

 
 

Featured Articles from Trusted Partners:

👀Learn How Dividends Create Passive Income for Life
Receive $200 Off Motley Fool Epic. The Motley Fool Epic $299 discounted offer is based on $499/year list price. Introductory promotion for new members only. Take control of your money and your portfolio with Motley Fool Epic.

💵New Income System Could Pay You $4,243 Monthly
You could collect an average of $4,243 per month starting as early as next week with a new payout system for income investors. New registrations are being accepted for investors who want to be in a position to start with their first payout next week.

🚀Easy 92% Crypto Dividends (No Coins Required)
COIN stock doesn't pay a dividend... But there's actually a new way to collect a massive dividend that's indirectly based on the stock and offers a terrific monthly income (currently yielding nearly 92% on a forward basis).

🤝Free Advisor Match with Wiseradvisor.com
Don't leave your retirement to chance! Get matched with a trusted financial expert for FREE and make the most of your tax refund. Get started now.

⚠️Dennis Quaid's #1 Warning for Americans
Here's the thing: life doesn't come with guarantees. The economy shifts, markets stumble, and years of hard work could slip through your fingers like sand. But it doesn't have to be that way for you. So request a free copy of this Gold & Silver Guide that will arrive right to your doorstep when you act now.

 

 
 

Follow us on X, Follow us on Twitter