Thursday, February 23, 2012

Volatility: "Subdued VIX Not Showing Complete Risk Story"

Groovin' and behoovin' here at station W-VIX, all volatility, all the time.
From MarketBeat:
On its face, the market’s fear gauge hardly looks fearsome, but other volatility metrics show expectations for choppier trading that could jolt this year’s run-up in stocks.

The Chicago Board Options Exchange Volatility Index has plummeted as the broader stock market staged its best yearly start in two decades. The VIX, as the index is known, has fallen more than 22% so far in 2012, trading below 18 today. The S&P 500, meanwhile, has climbed 8% so far this year.
Stock market volatility has deflated, and shares have gained, as investors turned increasingly upbeat about the pace of U.S. economic growth, and less worried that Europe’s sovereign debt issues will cripple financial markets.

A sharp rise in stocks has pinned the VIX below its long-term average near 20 for much of the last month, a sign of reduced short-term risk expectations.

But even as the S&P 500 flirts with nearly four-year highs, lower-than-average absolute VIX readings obscure other, bearish signals from the volatility complex.
First, the VIX has been creeping higher, in the same direction as stocks, for the last two weeks, a signal that options traders feel increasingly uneasy about a sustainable rally in U.S. stocks. Through Wednesday’s close, the VIX has edged up 2% since Feb. 8, even as the S&P 500 has risen 0.7%.

The trend is more dramatic in VIX futures, the prime vehicles of  volatility trading. March futures contracts on the VIX have climbed 3.8% over the last two weeks, while April VIX futures are up nearly 8.9%. Options on the VIX, as well as VIX exchange-traded notes, are tied to futures. March futures settled at  21.80 Wednesday, while April futures settled at 24.24....MORE
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