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VIX and the Stock Market Rise: Should You Worry?
The financial media often suggests that daily changes in the Implied Volatility Index (VIX) are a signal of investor sentiment. Despite how often they are quoted and discussed, many investors do not understand what volatility numbers actually mean. We take this opportunity to help you better understand implied volatility. We also discuss less common implied volatility measures that can help you better assess whether implied VIX numbers indicate bullish or bearish sentiment. The timing of this article is important because the VIX is unusually rising with the market. With the presidential election just weeks away, the Federal Reserve’s monetary policy stance changing, and the possibility of an Israeli attack on Iranian oil facilities, it is not surprising that the level of inherent risk is rising. Will the VIX continue to rise along with the market’s gains, or will the market correct? The VIX volatility index, also known as the fear index, is widely used to gauge investor sentiment. Many investors believe that a rising VIX means that market participants are becoming increasingly worried about the stock market. This is often true, but not always. The VIX uses the prices of various monthly call and put options on the S&P 500 and weights the prices based on the expiration time and the difference between the strike price and the current price of the S&P 500. The 500 goes through complex calculations to arrive at the VIX value and is expressed as an annual percentage. Additionally, the VIX is priced as a change of one standard deviation. This means that the probability that the S&P 500 will remain within the VIX ratio is 68%. For example, a VIX value of 15 means that expected annual volatility is 15%. In this case, the options market is predicting a 68% probability that the S&P 500 will trade within 15% of its current level over the next year. The chart below shows recent VIX ranges. It shows how much the S&P 500 has moved and is expected to move based on the current (22), highest (37), and lowest (12) VIX levels over the past year. The range varies widely depending on the VIX. The VIX measures what market participants collectively think the market is likely to range in. However, it does not determine whether puts or calls have more influence. So it does not show whether the market is making more speculative bets on the upper band of the range or whether investors are aggressively protecting against the lower band. Fortunately, the other volatility measures we are discussing now shed additional light on market expectations. Put-call spread measures the difference in the prices of put and call options at different strike prices for the same index or asset. If the put and call options have different prices, spread exists even if the distance from the strike price is the same and the expiration date is the same.Skewness simply measures whether investors are paying more for call options or put options. Lower skew means that investors are buying call options more aggressively than put buyers seeking protection. Conversely, positive skew means that investors seeking protection through put options are more aggressive than bullish call option buyers. Put-call skew helps us better assess whether bullish or optimistic investors are having more influence on the VIX. The chart below, courtesy of Market Chameleon, shows put-call skew as well as the 20-day and 250-day moving averages. It is currently hovering above the shorter 20-day moving average and the longer-term average. Therefore, investors have been buying put options more aggressively than calls lately. Like the VIX, this chart suggests bearish investor sentiment. Put-Call Ratio Unlike skew and the VIX, the put-call ratio measures sentiment by measuring the volume of options contracts. This ratio divides the number of put options by the number of call options over a given time period. A ratio below 1 suggests bullish sentiment, as more call options are being purchased than put options. Conversely, a ratio above 1 reflects bearish sentiment. As you can see below, the index is currently at its lowest level in a year and the second lowest since March 2022. Simply put, the number of calls being purchased is more than twice the number of puts. Simply put, there are very few equity hedgers. Unlike the VIX, which measures expected market volatility in the range of 1 standard deviation, or 68% accuracy, the Skew Index calculates the probability of extreme tail events, defined as events with 2 to 3 standard deviations. The Skew Index and the VIX tend to move in the same direction, but the differences can provide clues. Like the VIX, the Skewness Index does not provide any information about whether the index is driven by call or put transactions. The Skewness Index uses the prices of out-of-the-money (OTM) options on the S&P 500. The index typically ranges from 100 to 150. Numbers below 120 generally reflect a stable situation. Rising above 120 means that investors are increasingly betting or hedging against larger market moves. The chart below, provided by VIXFAQ.com, quantifies the volatility implied by the Skewness Index. For example, an exponent value of 130 indicates that there is a 10.40% chance of a 2 standard deviation move and a 1.92% chance of a 3 standard deviation move over the next 30 days. The chart below, provided by StockCharts, shows the CBOE Skewness Index near a five-year high. Investors continue to bet on above-average levels of implied volatility. We wrote this article to better explain the VIX and implied volatility. Furthermore,It is important to consider whether the VIX rising along with the market could be a serious warning sign. This behavior is unusual, but not unprecedented. The first chart shows that the VIX rise is still very modest in the context of its 30-year history. The second chart shows a similar period when the S&P 500 was within 1% of its all-time high. As it shows, this could eventually signal a significant decline, but the signal may be premature. In fact, history suggests that this may have happened many years ago. In addition to the VIX, we also presented other implied volatility calculations. Both skewness measures support the theory that the higher VIX is a function of long puts rather than long calls. However, the put-call rate, which is at a one-year low, does not support negative sentiment. In fact, I am quite optimistic. What we get from the mixed options data is that the market is concerned, but not fully committed to overly bullish or bearish positions. As mentioned at the beginning, you should pay attention to changes in market trends if the VIX continues to rise or continues to rise and other indicators confirm that the VIX is rising due to put buying. Pay more attention to technical analysis, including key moving averages and relative price positions. The VIX is currently warning of a possible bearish move in price. The warning is useful, but remember that if someone had positioned solely on the VIX between 1997 and 1999, they would have lost a huge profit. Translated here The Elliott Wave Principles Wave Enthusiast's Handbook is now at your disposal. You can view it here (if you want to help the project, you can register via the link). And don’t forget to subscribe to my 11-page report on Telegram that presents the main Elliott wave patterns and shows how to identify them. Market Trends In addition to the VIX, we also presented other implied volatility calculations. Both skew measures support the theory that the higher VIX is a function of long puts, not long calls. However, the put-call rate, which is at a one-year low, does not support the negative sentiment. In fact, I am quite optimistic. From the mixed options data, we get the message that the market is concerned, but not fully committed to overly bullish or bearish positions. As mentioned at the beginning, you should pay attention to changes in market trends if the VIX continues to rise or continues to rise and other indicators confirm that the VIX is rising due to put buying. Pay more attention to technical analysis, including key moving averages and relative price positions. The VIX is currently warning of a possible bearish price move. The warning is useful, but remember,that if someone had positioned solely on the VIX between 1997 and 1999, they would have lost out on huge gains. Translated here The Elliott Wave Enthusiast’s Guide to Elliott Wave Principles is now at your disposal. You can view it here (if you want to help the project, you can register here). And don’t forget to subscribe to my 11-page report on the Telegram channel, which presents the main Elliott wave patterns and shows how to identify them. Market Trends In addition to the VIX, we also presented other implied volatility calculations. Both skewness measures support the theory that the higher VIX is a function of long puts, not long calls. However, the put-call rate, which is at a yearly low, does not support the negative sentiment. In fact, I am quite bullish. What we get from the mixed options data is that the market is concerned, but not fully committed to overly bullish or bearish positions. As mentioned at the beginning, you should pay attention to changes in market trends if the VIX continues to rise or continues to rise and other indicators confirm that the VIX is rising due to put buying. Pay more attention to technical analysis, including key moving averages and relative price positions. The VIX is currently warning of a possible bearish move in price. The warning is useful, but remember that if someone had positioned solely on the VIX between 1997 and 1999, they would have lost a huge profit. Translated here The Elliott Wave Principles Wave Enthusiast's Handbook is now at your disposal. You can view it here (if you want to help the project, you can register via the link). And don’t forget to subscribe to my 11-page Telegram report that introduces the major Elliott Wave patterns and shows how to identify them. Market Trends Introduces the major Elliott Wave patterns and shows how to spot key market trends. Introduces the major Elliott Wave patterns and shows how to spot key market trends. Both skew indicators support the theory that the higher VIX is a function of long puts rather than long calls. However, the put-call rate, which is at a yearly low, does not support the negative sentiment. In fact, I am quite bullish. From the mixed options data, we get the message that the market is concerned, but not fully committed to overly bullish or bearish positions. As mentioned at the beginning, you should pay attention to changes in market trends if the VIX continues to rise or continues to rise and other indicators confirm that the VIX is rising due to put buying. Pay more attention to technical analysis, including key moving averages and relative price positions.The VIX is currently warning of a possible bearish move in price. The caveat is useful, but remember that if someone had positioned solely on the VIX between 1997 and 1999, they would have lost out on huge profits. Translated here The wave enthusiast’s guide “Elliott Wave Principles” is now at your disposal. You can view it here (if you want to help the project, you can register via the link). And don’t forget to subscribe to my 11-page report on the Telegram channel, which presents the main Elliott wave patterns and shows how to identify them. Market Trends In addition to the VIX, we also presented other implied volatility calculations. Both skewness measures support the theory that a higher VIX is a function of long puts rather than long calls. However, the put-call rate, which is at a one-year low, does not support the negative sentiment. In fact, I am quite optimistic. The message we get from the mixed options data is that the market is concerned, but not completely committed to overly bullish or bearish positions. As mentioned at the beginning, you should pay attention to changes in market trends if the VIX continues to rise or continues to rise and other indicators confirm that the VIX is rising due to put buying. Pay more attention to technical analysis, including key moving averages and relative price positions. The VIX is currently warning of a possible bearish move in price. A caution is useful, but remember that if someone had positioned solely on the VIX between 1997 and 1999, they would have lost a huge profit. Translated here The Elliott Wave Principles Wave Enthusiast's Handbook is now at your disposal. You can view it here (if you want to help the project, you can register via the link). And don’t forget to subscribe to my 11-page Telegram report that introduces the major Elliott Wave patterns and shows how to identify them. Market Trends Introduces the major Elliott Wave patterns and shows how to spot key market trends. Introduces the major Elliott Wave patterns and shows how to spot key market trends. Both skew indicators support the theory that the higher VIX is a function of long puts rather than long calls. However, the put-call rate, which is at a yearly low, does not support the negative sentiment. In fact, I am quite bullish. From the mixed options data, we get the message that the market is concerned, but not fully committed to overly bullish or bearish positions. As mentioned at the beginning, you should pay attention to changes in market trends if the VIX continues to rise or continues to rise and other indicators confirm that the VIX is rising due to put buying. Pay more attention to technical analysis,Including key moving averages and relative price positions. The VIX is currently warning of a possible bearish move in price. The caveat is useful, but remember that if someone had positioned solely on the VIX between 1997 and 1999, they would have lost out on huge profits. Translated here The Elliott Wave Enthusiast’s Handbook of Wave Principles is now at your disposal. You can view it here (if you want to help the project, you can register via the link). And don’t forget to subscribe to my 11-page report on the Telegram channel, which presents the main Elliott wave patterns and shows how to identify them. Market Trends In addition to the VIX, we also presented other implied volatility calculations. Both skewness measures support the theory that a higher VIX is a function of long puts, rather than long calls. However, the put-call rate, which is at a yearly low, does not support the negative sentiment. In fact, I am quite optimistic. From the mixed options data, we get a message that the market is concerned, but not completely committed to overly bullish or bearish positions. As mentioned at the beginning, you should pay attention to changes in market trends if the VIX continues to rise or continues to rise and other indicators confirm that the VIX is rising due to the purchase of put options. Pay more attention to technical analysis, including key moving averages and relative price positions. The VIX is currently warning of a possible bearish move in price. Caution is useful, but remember that if someone had positioned solely on the VIX between 1997 and 1999, they would have lost huge profits. Translated here The Wave Enthusiast's Handbook "Elliott Wave Principles" is now at your disposal. You can watch it here (if you want to help the project, you can sign up here). And don't forget to subscribe to my 11-page report on Telegram, which introduces the main Elliott wave patterns and shows how to identify them. Market Trends. Introduces the main Elliott wave patterns and shows how to identify key market trends. Introduces the main Elliott wave patterns and shows how to identify key market trends.which presents the main Elliott wave patterns and shows how to identify them. Market Trends In addition to the VIX, we also presented other implied volatility calculations. Both skewness measures support the theory that a higher VIX is a function of long put options rather than long call options. However, the put-call rate, which is at a one-year low, does not support negative sentiment. In fact, I am quite optimistic. From the mixed options data, we get the message that the market is concerned, but not fully committed to overly bullish or bearish positions. As mentioned at the beginning, you should pay attention to changes in market trends if the VIX continues to rise or continues to rise, and other indicators confirm that the VIX is rising due to put option buying. Pay more attention to technical analysis, including key moving averages and relative price positions. The VIX is currently warning of a possible bearish price move. The caveat is useful, but remember that if someone had positioned solely on the VIX between 1997 and 1999, they would have lost out on huge profits. Translated here The Elliott Wave Enthusiast’s Handbook is now at your disposal. You can view it here (if you want to help the project, you can register using the link). And don’t forget to subscribe to my 11-page report on the Telegram channel, which introduces the main Elliott wave patterns and shows how to identify them. Market Trends. Introduces the main Elliott wave patterns and shows how to identify key market trends. Introduces the main Elliott wave patterns and shows how to identify key market trends.which presents the main Elliott wave patterns and shows how to identify them. Market Trends In addition to the VIX, we also presented other implied volatility calculations. Both skewness measures support the theory that a higher VIX is a function of long put options rather than long call options. However, the put-call rate, which is at a one-year low, does not support negative sentiment. In fact, I am quite optimistic. From the mixed options data, we get the message that the market is concerned, but not fully committed to overly bullish or bearish positions. As mentioned at the beginning, you should pay attention to changes in market trends if the VIX continues to rise or continues to rise, and other indicators confirm that the VIX is rising due to put option buying. Pay more attention to technical analysis, including key moving averages and relative price positions. The VIX is currently warning of a possible bearish price move. The caveat is useful, but remember that if someone had positioned solely on the VIX between 1997 and 1999, they would have lost out on huge profits. Translated here The Elliott Wave Enthusiast’s Handbook is now at your disposal. You can view it here (if you want to help the project, you can register using the link). And don’t forget to subscribe to my 11-page report on the Telegram channel, which introduces the main Elliott wave patterns and shows how to identify them. Market Trends. Introduces the main Elliott wave patterns and shows how to identify key market trends. Introduces the main Elliott wave patterns and shows how to identify key market trends.Translated here The Wave Enthusiast's Guide to Elliott Wave Principles is now at your disposal. You can view it here (if you want to help the project, you can register using the link). And don't forget to subscribe to my 11-page report on the Telegram channel, which presents the main Elliott wave patterns and shows how to identify them. Market Trends. Introduces the main Elliott wave patterns and shows how to identify key market trends. Introduces the main Elliott wave patterns and shows how to identify key market trends.Translated here The Wave Enthusiast's Guide to Elliott Wave Principles is now at your disposal. You can view it here (if you want to help the project, you can register using the link). And don't forget to subscribe to my 11-page report on the Telegram channel, which presents the main Elliott wave patterns and shows how to identify them. Market Trends. Introduces the main Elliott wave patterns and shows how to identify key market trends. Introduces the main Elliott wave patterns and shows how to identify key market trends.