VIX: Don't be Deceived

Don't be deceived by a low spot CBOE Volatility Index (VIX) value. In the last few weeks, I've seen a lot of traders on the web and on Twitter (and in sell-side research notes) making these sorts of claims about the sub-20 VIX:

1. A low VIX means it's a cheap time to hedge your stocks.

2. A low VIX means investors are complacent / the market is likely to correct soon.

Neither of these are true. Let's tackle the first point. A low VIX just means that SPX options at a one-month horizon don't cost very much in absolute IV terms. But if I tell you that I have a bag full of calls and puts priced at 14% annualized IV, and ask whether you want to buy some to hedge your stock positions, how will you know whether that's a good price for those options? You can only know whether the options are cheaply or richly priced in relation to the actual price volatility of the underlying index.

SPX one-month historical volatility is not 14% - it's more like 11%. That means SPX options are either fairly valued or are expensive. They're not extremely expensive, and if the market does turn south you can make some profits by buying puts. But those options also aren't a screaming buy, not when they cost 27% more than the recent historical volatility of the index. As I explained at the Condor Options blog last weekend, another reason not to think that equity hedges are especially cheap here is that once you start looking further out in time and further out of the money, the costs of put options goes up considerably.

I think you could do a lot worse than to keep in mind the following rule: any given spot VIX value doesn't mean anything, ever. I'll debunk the second point in my article on Thursday.

Options Industry Council FREE Three-Part Webinar Series: Part Two Wednesday, March 21 at 7pm ET. CLICK HERE FOR INVITE AND TO REGISTER.

On Saturday, March 24, the CBOE, Option Pit and OptionsProfits are hosting a full-day course, The Professional Approach to Trading SPX. CLICK HERE FOR INVITE AND TO REGISTER.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits.

Jared can be followed on Twitter at twitter.com/CondorOptions.
At the time of publication, Jared Woodard held positions in SPX and VIX.

If you liked this article you might like

VIX Still Matters, So Don't Look Away: Cramer's 'Mad Money' Recap (Tuesday 5/9/17)

It's the Earnings, Not the Politics: Cramer's 'Mad Money' Recap (Tuesday 4/25/17)

Seems Like This Bull Can Take Any Hit: Cramer's 'Mad Money' Recap (Wednesday 1/4/17)

Jim Cramer's 'Mad Money' Recap: We're Stuck in Oz With No Way Out

Jim Cramer's 'Mad Money' Recap: Why Some Stocks Pass Earnings Test and Others Fail