I vote for the latter–even though I acknowledge that the VIX, the CBOE S&P Volatility Index (VIX), which is supposed to track expectations for short-term volatility in the market, is behaving very strangely lately.
The VIX is supposed to climb along with fear in the market as investors and traders step up to buy options and futures, even at higher prices, in order to hedge risk.
But even as stocks have struggled in December the VIX has tumbled. It was down another 5.01% today to just 20.87.
That has put the index within shouting distance of its 2022 lows at 19.56 on August 18, and at 18.57 on April 4, and at 16.80 on January 3.
Right now the VIX looks like it’s headed back to its 5-year average of around 17 just as stocks and the global economy are looking at increased levels of near-term risk.
To me, that argues that this is a good time to buy VIX volatility, the chance that the price the market is willing to pay for risk will head up because fear is on the march.
So tomorrow, December 27, I will add the February 15 Call Options on the VIX with a strike of 24 (VIX230215C00024000) to my Volatility Portfolio. That option traded at $2.84 on December 26 or $284 for a contract of 100.
There is, of course, a chance that the VIX is broken and that it no longer reflects the level of fear and the price that investors and traders are willing to pay to hedge risk. There are lots more ways to hedge risk than there once were. The growth of hedge funds and similar investment vehicles as well as portfolio strategies that look to be direction neutral have reduced the use of more vanilla risk hedges.
I think there’s a good deal of truth in this argument.
But a sizeable part of the investing world still uses the hedging tools tracked by the VIX. And I think they will return to buying risk hedges when the end of the year passes. Right now there’s an assumption that somehow we will get a Sant Claus rally in the last days of 2022 and the first trading days of 2023. Why hedge if the market–in the very short term–has a bias toward climbing higher? (The next VIX options expiration date is December 28, which probably plays into this attitude.)
If I’m right, and I do recognize that level of speculation in my speculations, then we should see a return of the VIX to levels of 25 or more that strike me as more reflective of the actual risk in the market over the next month or two. That is the period that the VIX tracks by the way.