Traders are weighing up on VIX call options as history reveals that there is a fair chance that stock market volatility will likely to increase. Also, calls on the Chicago Board Options Exchange Volatility Index, which was considered to be a lot more valuable during times of market stress, which was outnumbered betting from a decline in market swings by nearly 3.4-1 in this month alone for the past six years. Furthermore, the VIX has closed way below 15 for the past month which is expected to rise after it reached such low levels respectively.

Although investors are presently getting ready for an inevitable turbulence, the overall trading has since been calm for most of the year with the S&P 500 Index fairing well in a new record. Moreover, the calmness is not expected to last long despite concerns regarding slowing economic growth and ongoing tensions between the Ukraine and Russia.

There were plenty of sceptics that regard the situation of the Ukraine since its GDP was grossly outnumbered and that earnings and stocks are overvalued. Analysts predict that the possibility for a correction becomes greater.

VIX Calls

Traders were using the VIX as an instrument to safeguard their stock holdings from possible losses since the gauge is moving in the contrary direction of the S&P 500 which was approximately 80 % of the time. The measure is tracking the cost of S&P 500 options which becomes hefty when the anticipations for the volatility subsequently increases.

The VIX declined 8.7 % a week prior to 11.36, which closed 2 points from its previous all-time low. There are about 5.5 million outstanding calls on the gauge as compared with 1.7 million puts.

Misses on Retails

The U.S. economy with its weak spending by lower income consumers and dire weather conditions had led to retailers to miss out from their first-quarter earnings projections by a broad margin in more than a decade.

The general stock market has signaled off any concerns this year regarding the economy and respective valuations. The S&P 500 leaped 1.2 % last week to a record 1,900.53. The gauge trades was at 17.5 times of reported profit which was near its peak in well over four years.

The number of outstanding VIX calls is in the rise partly since the more accepted strategies used to speculate that it will remain within a certain range. One of such techniques is known as a call spread, when a trader purchase options at one strike price and offsets the price by selling contracts with a much higher strike price.

Absent market apprehension

There is indeed a feeling of complacency in the market with the VIX not likely to remain at such low levels for any time soon. There have been fifteen similar instances in the course of three decades when the VIX was under 15 with at least 14 % below its usual average from the past 50 and 100 days. Moreover, the VIX increased more than 20 % every time in the next three months with a median increase of 45 % at the peak. Furthermore, it would be extremely remarkable and possibly unheard of in not seeing a spike in volatility in the up and coming months.

Last Updated: January 27th, 2021