An old friend of mine, Joe Zicherman, called me at the close Monday and remarked that the S & P had been advancing all day to a new 14-month high, and yet the CBOE Volatility Index (VIX) had gone up as well, ending the day 7% higher. Since the VIX normally is used as a “fear gauge”, he noted that was unusual, and asked what might have caused that. Interpreting what the VIX is trying to “say” is a difficult game. Remember, it is a measure of near-term (30-day) activity for S & P 500 put and call options. The simplest explanation for why the VIX rose midday is that traders were anticipating higher volatility in the near term, even as the market moved up. Volatility from what? “I think the VIX moved up because some people decided to buy some S & P puts today to hedge their recent purchases in front of [Tuesday’s] CPI number and Wednesday’s Fed announcement,” Matt Maley from Miller Tabak told me. That itself could have helped fuel the late-day rally: “As the market saw a second leg higher this afternoon, the market makers who sold those options started to get squeezed and the rally fed on itself once again,” he said. There’s been call buying too Mike O’Rourke, the chief market strategist at Jones Trading, makes another interesting point: “The option volumes have been heavy on the call side and puts have been less active. The Put/Call ratio is actually low.” He has a point. Usually, the put/call ratio is near 1 or at times over 1 as traders will buy protection (puts) because the market tends to rise over time. However, the put/call ratio has been low recently, between 0.7 and 0.8, as traders have been buying calls, betting the market will keep rising. That (call buying) can also move the VIX up. “The aggressive call buying is portfolio managers and traders willing to pay additional premium as insurance making sure they participate if the breakout experiences upside follow through,” O’Rourke told me. Eric Johnston at Piper Sandler agrees: “The call buying has been very strong as investors chase upside,” he told me. Ultimately, it’s probably best not to overthink this too much. Danny Kirsch at Piper Sandler noted that there were two big events this week (CPI and the Fed meeting) that would keep option prices “sticky.” Once those events were past, he says, “assuming no blow ups, expectations are for a move lower in VIX.” Why is the VIX so low? Finally, why is the VIX at 14 to begin with? The historic long-term average is closer to 20, so 14 seems awfully low, right? Again, don’t overthink it too much. The always-astute Steve Sosnick, chief strategist at Interactive Brokers, noted in a piece last week that the market has been rising recently. He highlighted the well-known behavioral psychology phenomenon known as “recency bias”: “the phenomenon that people tend to favor recent events over those that occurred some time ago.” The recent events are that the market is rising, so the urge to buy protection declines: “When institutions get nervous, they seek protection in VIX. When they feel sanguine, they don’t.”
