Is The Volatility Index Really That Low?

One thing we keep seeing all over the place is how the VIX (volatility index) is so low and that this means the market is extremely complacent and therefore on the verge of a decline.  This might be true, but I think it’s important to provide some perspective when using an indicator like the VIX.  To get a better idea of the VIX it can be helpful to look at more than merely the front month contract.  In a recent research note analysts at Societe Generale elaborated on the current environment and the story behind the current VIX levels:

“the most striking aspect of the current situation is the historical steepness of the vol contango, meaning that mid/long-term volatilities are much more expensive (in vol point and historically) than short-term vols. If we try to translate this into a market sentiment analysis, we can say that the market is pretty confident in the short-term outlook but extremely cautious on the longer-term outlook.”

Without getting bogged down in the details, that basically means traders are complacent in the near-term, but extremely cautious in the long-term.  So you kind of have a mixed reading here from a sentiment perspective.  The VIX is useful in gauging perspective, but this is a good example of the mixed messages it can send at time.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • H. Sean Sandhu

    Also of note should be the large premium between VIX, the front-month and realized volatility. 20-day realized volatility is below 10%.

  • Zachary Abrams

    Maybe a tail risk indicator for next 30 days? For now those risks are de facto “removed”. But for example as you point out Euro problems are not resolved and when in the likely event Spanish politicians are forced to choose bt OMT and ESM or deepening the depression, then what? That risks, plus others just been kicked.

  • Anton

    On the same topic, said in a beautiful way: Volatility of an Impossible Object: Risk, Fear, and Safety in Games of Perception,

  • John

    Isn’t this just another reflection of investors reaching for short term yield? Just seems to be another sign of folks willing to blow up big time for a little better positive results in the “probable” present.

  • David

    The long-term chart for VXX is a graphical representation of this story. It is the king of reverse splits.

  • pollen_catcher

    No, that is a reflection of a worthless, fraud investment vehicle that doesn’t track what it says it tracks.