DES MOINES, Iowa — The rapid swings in the stock market seem to have subsided, but what should investors make of the relative calm?
One widely watched indicator of whether investors indeed feel better is the Chicago Board Options Exchange volatility index. Known best by its ticker symbol "VIX,” the index reflects investor sentiment about expected market volatility over the next 30 days. Measured on a point scale, the VIX is based on how much investors are willing to pay for options — contracts to buy or sell stocks at a specified price and time.
Gauging anxiety
Options can help investors insulate themselves against price swings. That’s because when stock prices are volatile, investors are willing to pay a higher price for options so they can lock in a set price. This in turn raises the VIX.
Because increased investor anxiety can cause the VIX to climb, it’s frequently called the fear index. It’s a label that management of the CBOE discourages, saying it is more accurately just a measure of anticipated fluctuations. Still, during the market instability last fall, the record high level of the VIX was construed by many as reflecting a heightened fear.
Traditionally the VIX has traded between 10 and 30. The lower number means investors expect little rapid movement in the market, a higher number means there are expectations for sudden market swings, usually downward. The VIX hit a record 89.5 in October at the height of the financial market meltdown.
"Certainly when it was at 80 you could call it the fear gauge for sure,” said Dan Deming of Stutland Equities, who trades options tied to the VIX, noting that was an extremely elevated and unusual time.
Uncertainty lingers
So, where are we now and what does it mean?
Since the beginning of the year, the VIX has largely been under 50. The index spent most of the first quarter in the mid- to upper-40s. In April it fell below 40, and it’s currently in the low-30s. The recent downward movement indicates a sense of relative calm from big swings in the stock market.
But with the historical average around 18, the current level is nearly twice the norm. That means that while investors feel better than they did last fall and even earlier this year, they believe some market uncertainty still lingers.
Their strengthened comfort level can be attributed, at least in part, to progress being made to stabilize the nation’s banks. Investors have a better understanding of the government’s bailout plan and they’ve seen some glimmer of hope that the recession may end later this year.
Before the market meltdown, many investors spotted buying opportunities when the VIX climbed above 30. That’s because at that level the VIX reflects a general expectation that the market will fall, presenting opportunities to buy low, said Gary Gordon, president of Pacific Park Financial Inc. in Aliso Viejo, Calif.
That changed when the VIX blew the roof off any previous high mark last fall, rendering old benchmarks useless for awhile.
"It was one of the ultimate contrarian indicators of fear and greed, but now you have a whole new question: What do you do between 30 and 80?” Gordon said.
Chances are the VIX eventually will settle back down to its previous levels and many investors will once again consider it as one indicator of short-term market behavior, Gordon said. Though he said they may not use an above-30 mark as a sign to buy with the same conviction as before.
by associated press
One widely watched indicator of whether investors indeed feel better is the Chicago Board Options Exchange volatility index. Known best by its ticker symbol "VIX,” the index reflects investor sentiment about expected market volatility over the next 30 days. Measured on a point scale, the VIX is based on how much investors are willing to pay for options — contracts to buy or sell stocks at a specified price and time.
Gauging anxiety
Options can help investors insulate themselves against price swings. That’s because when stock prices are volatile, investors are willing to pay a higher price for options so they can lock in a set price. This in turn raises the VIX.
Because increased investor anxiety can cause the VIX to climb, it’s frequently called the fear index. It’s a label that management of the CBOE discourages, saying it is more accurately just a measure of anticipated fluctuations. Still, during the market instability last fall, the record high level of the VIX was construed by many as reflecting a heightened fear.
Traditionally the VIX has traded between 10 and 30. The lower number means investors expect little rapid movement in the market, a higher number means there are expectations for sudden market swings, usually downward. The VIX hit a record 89.5 in October at the height of the financial market meltdown.
"Certainly when it was at 80 you could call it the fear gauge for sure,” said Dan Deming of Stutland Equities, who trades options tied to the VIX, noting that was an extremely elevated and unusual time.
Uncertainty lingers
So, where are we now and what does it mean?
Since the beginning of the year, the VIX has largely been under 50. The index spent most of the first quarter in the mid- to upper-40s. In April it fell below 40, and it’s currently in the low-30s. The recent downward movement indicates a sense of relative calm from big swings in the stock market.
But with the historical average around 18, the current level is nearly twice the norm. That means that while investors feel better than they did last fall and even earlier this year, they believe some market uncertainty still lingers.
Their strengthened comfort level can be attributed, at least in part, to progress being made to stabilize the nation’s banks. Investors have a better understanding of the government’s bailout plan and they’ve seen some glimmer of hope that the recession may end later this year.
Before the market meltdown, many investors spotted buying opportunities when the VIX climbed above 30. That’s because at that level the VIX reflects a general expectation that the market will fall, presenting opportunities to buy low, said Gary Gordon, president of Pacific Park Financial Inc. in Aliso Viejo, Calif.
That changed when the VIX blew the roof off any previous high mark last fall, rendering old benchmarks useless for awhile.
"It was one of the ultimate contrarian indicators of fear and greed, but now you have a whole new question: What do you do between 30 and 80?” Gordon said.
Chances are the VIX eventually will settle back down to its previous levels and many investors will once again consider it as one indicator of short-term market behavior, Gordon said. Though he said they may not use an above-30 mark as a sign to buy with the same conviction as before.
by associated press
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