The talk of the trading world right now is the huge move higher in the VIX. I have three theories on why the VIX has surged 50% in recent days, while the S&P 500 has only fallen 2%. Hear my three theories in this video.
Video Transcript:
The hot topic this week is the steady rise of the VIX, which has gained nearly 50% this week while the S&P 500 has only fallen 1.9%. What’s so interesting about this dynamic is that in a world where the VIX is rising 50%, I would expect the equity market to have fallen 4% or 5%. Instead, its only fallen 1.9%. So, why is this?
Well, I have three theories.
One, selling volatility or the VIX—or just options and puts in general—has become a very popular strategy for hedge funds and pension funds. In this zero interest rate environment, to be able to sell volatility and collect a little yield month after month is a big score when, in theory, you can’t get much of a return in the bottom market. So if you’re short volatility and the VIX is rising, you need to pay up to at least get flat maybe even along that volatility, so they’re chasing prices higher and higher.
My second theory is that a lot of traders don’t have hedges on. The market’s been steady, but with this Brexit vote coming—and it’s becoming more and more likely that Britain will leave the European union—people need hedges because they are paying up for that protection.
My third theory is that the Brexit vote is a truly binary event; it’s either yes or no. No one really understands what the ramifications would be if Britain were to leave the European Union. Would the market fall 1%, 5%, 10%? While the market thinks the vote will come in with Britain remaining in the European Union, you still probably want to hold your equities but with a hedge. So traders are not selling their equities, and that’s why the market hasn’t fallen that much, but the traders are racing to buy puts and protection against those equities.
Thanks.
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In Cabot Options Trader, Jacob uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. When the time is right, he sends specific option buy and sell alerts via email and text-message for immediate action. He also sends out a weekly update with his view on the options market, the open option positions and his outlook for the coming week.
With a little education, options trading can be simple, low-risk, fun and most importantly, profitable. Find out more here.
