21 July, AtoZForex.com, Vilnius – The Chicago Board Options Exchange (CBOE) Volatility Index, or abbreviated as VIX, is commonly known as the market’s fear indicator. Interestingly, the VIX has reached a record low for the year, over recently. According to one professional trader, this is welcoming news for the stock market.
The VIX indicator is constructed on the S&P 500 options’ price and shows the market’s expectation of 30-day volatility. The greater the move size investors predict, the more they tend to pay for options, and the higher the VIX will rise. Since S&P 500 options are most commonly used to get downside protection against long positions on stocks, the VIX is generally a measure of market fear. The easiest way to put it: the VIX is inversely correlated with market’s volatility.
Friday VIX dropped 29% to 12.04
The VIX has dropped 29% over the past week to 12.04 on Friday, the lowest point since December 2014. The fear index peak was reached in October 2008 achieving 89.53. Concerning the market Boris Schlossberg of BK Asset Management noted on Friday to the CNBC’s Trading Nation: “The big surprise this week was all the positive news, although it may not seem so initially.”
The positive fundamentals included resolved issues with Greece, lower oil prices due to Iran nuclear deal and to top it off, companies such as Google and Netflix kicked off the second quarter earnings season with higher than predicted results. Hence, “for the next week or so, we see to have this aura of calmness, and it is very likely stock gains are going to continue, and the VIX is going to continue to go down,” points out Schlossberg.
In contrary, Stacey Gilbert of Susquehanna International Group argued the low VIX is not anything to get excited about. “The market is just suggesting that some of the market risk has been taken out, but that’s also being reflected in the actual price of the underlying index,” Gilbert said on Friday. “This is pretty much in line with what you would expect.”
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