Volatile times return, but for how long?

September 25, 2014 08:36 AM

The sudden slide for stocks on Thursday reminds us just how absent volatility has been during the rally that drove market indices to record highs.

The 1.26% slide for the S&P 500 index (CME:SPZ14) is the sixth largest drop during 2014 and has lifted the CBOE Vix index to 16.22. Investors clamoring for protection against a bearish correction have pushed the index up by more than one-fifth in just one day. Still, the jump in the so-called fear gauge leaves it below levels associated with other significant market moves. The 2% slide for stocks in July, for example, was associated with a 16.95 reading for the Vix.

Also displayed in the table below is the morning-after-the-night-before look for the Vix. Two-weeks on from each slide in stocks has been associated with lower implied volatility. This year has provided two exceptions. When stocks fell on July 17 by 1.18%, the Vix rose to only 14.5%.

Two weeks later it jumped by a further 17%. And in January the Vix rose by 31% following a drop for stocks similar in magnitude to today’s decline. The question facing investors now is whether volatility will be sustained or whether premium sellers can collect premiums down the timeline potentially taking advantage of the recent pop. With investors scratching their heads over a catalyst for today’s decline, many are wondering whether this may or may not be the start of a bigger correction.

Table shows 2014’s biggest declines for S&P 500 stocks.

About the Author

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.