Good Morning, Volatility!
What Is The VIX?
The CBOE VIX index is the standard measure of volatility in the US stock market. Sometimes called the fear gauge, the VIX measures the volatility of weighted prices of the S&P 500 index over a wide range of options, contracts specifying the ability to buy or sell securities at a range of prices and at a range of market conditions. The VIX continues to be widely used by financial theorists, risk managers and volatility traders alike. Traders often use these options to hedge against market fluctuations.The index, which rises when stocks fall has been the source of large gains in the futures markets due to being so low for so long (CBOE.com).
How Has It Changed?
Shares of CBOE Global Markets Inc. tumbled 5.5% in trading Friday, after the futures and ETF company reported profit and revenue that marginally missed expectations. Since Monday February 5th, stocks have also taken a tumble marked by an startling uptick in volatility. A few exchange traded funds whose performance tracks the volatility index were the most outright victims of the downturn. The VIX hit record lows last year and has been called into question lately. VIX futures, the CBOE’s flagship volatility product has experienced a tumultuous run over the past 5 years (MarketWatch).
The surging VIX was due in large part to what investors call technical factors including algorithmic trading which was among the sources of the stock market’s drop this week. Some algorithms have sell orders built into them when the market reaches a certain point. Several products by Credit Suisse Group and Nomura Holdings which add value when there is low volatility have gained three times their value in the past year, yet the rise in the VIX over the past week has erased those gains (Wall Street Journal). Benchmark 10-year U.S. Treasury yields, whose rise was the trigger for the stock market sell-off that began last Friday, stopped their advance in trading Thursday at 2.833% after hitting as high at 2.884%.
What Can We Do?
There are at least a handful of things to keep in mind while the markets take us for a roller coaster ride.
- Assess (or reassess) our risk tolerance. Riskalyze is our preferred tool.
- Think long term (more than a week, month, or even a year).
- Automate our savings contributions from payroll.
- Automate our entry points using dollar cost averaging.
- Place reminders in our calendar for periodic rebalancing (every 3, 6, or 12 months)
Finally...relax! Humans have an uncanny knack for doing the exact wrong thing at the exact right time. Planning ahead helps to mitigate the risk of making an impulsive and emotional reaction.
CBOE Volatility Index (^VIX) Chicago Options - Chicago Options Delayed Price. Currency in USD. Yahoo Finance. https://finance.yahoo.com/quote/%5EVIX/chart?p=%5EVIX#
Baccardax, Martin. “Europe Weakens, Wall Street Futures Gain But VIX, Bond Yields Signal Caution.” The Street. 2/9/18. https://www.thestreet.com/story/14481798/1/europe-weakens-wall-street-futures-gain-but-vix-bond-yields-signal-caution.html
Kilgore, Tomi. “CBOE's Stock Tumbles After Profit, Revenue Miss.” MarketWatch. 2/9/18.
Hunter, Gregor. “Standout Fund is Taking a Beating.” The Wall Street Journal. 2/9/18.
Macintosh, James. “A Historical Tie Breaks, But Trouble Still Lurks.” The Wall Street Journal. 2/9/18.