Volatility decoupling from equity markets

Volatility at New Market Highs

We recently produced a chart for this column demonstrating that as the market continued to climb its proverbial wall of worry, so too did the measure of options implied volatility – aka the CBOE Volatility Index (VIX). The chart confirmed that for fresh highs for stocks, predicated upon eternal hopes of a spring rebound in the labor market and therefore growth, the fear gauge was tracking higher.

It seems that the decent February employment report, although a step in the right direction, has resolved little. Stocks are suffering from some inevitable ebbing following the latest strong flow. That in turn has prompted further defensive demand for the protection afforded by options. But to put the picture in better perspective, below is a table showing the history of volatility since just before the financial crisis toppled the global economy. The VIX rose to 14.40 as the S&P 500 index fell back to the flat-line having reached an earlier record high. 

 

Table – CBOE Volatility index – average annual reading 2006 to date

 

Date

Average

Close

2006

12.81

11.56

2007

17.54

22.50

2008

32.81

40.00

2009

31.45

21.68

2010

22.55

17.75

2011

24.20

23.40

2012

17.80

18.02

2013

14.25

13.72

Jan-14

13.51

14.28

Feb-14

14.07

15.51

Mar-14

14.50

14.35

 

The latest reading matches the average reading for all of 2013, which was 14.25. Prior to that the average reading for all of 2012 of 17.80 was the least volatile since 2008 and as investors started to see the results of firm central bank action, even if it was uncoordinated. And proving that volatility is in a class all of its own, January despite its surge and slump was less volatile on average than both February and March so far.

 

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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