As option traders, we always want to know where the Chicago Board Options Exchange’s Volatility Index (VIX) is and where it’s heading. Of course if we knew where it was heading, we’d be way ahead of the game. Well the following article may give you some insight on where it is heading, or at least let you know where most futures traders think it’s going to go.
The so-called “fear gauge” shows a relative calm at the end of 2011 but as 2012 begins, options trading investors should not be at all surprised if fear and anxiety suddenly reappear.
Specifically, the Chicago Board Options Exchange’s volatility index or VIX was at a five month low right before Christmas – closing at 20.73 after starting the week at 25.1. This sudden fall took many observers by surprise.
Even as investor anxiety has eased before the holidays, Europe’s debt problems along with worries over global growth remain. This suggests that the VIX’s sudden drop has more to do with seasonal factors such as thin volume along with the usually strong December performance rather than actual anxiety and fear falling.
Moreover, January VIX futures are priced around 25 while August VIX futures are priced at 29 – meaning that options trading investors are preparing for another bumpy wide next year.
Otherwise, it should be remembered that the VIX surged near 50 over the summer when stocks became particularly volatile and it topped out at 90 during the height of the 2008 financial crises.
In addition, trading volume has substantially slowed in December – making some investors cautious going into 2012.
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