CBOE volatility index signals no major tremors in market

Mecklai graph of the day: Fall of VIX

The CBOE Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The cost of U.S. stock options fell the most ever last week after a budget resolution and better- than-estimated jobs report sent equities to a five-year high. The Index known as the VIX, plunged 39 percent to 13.83 last week, the biggest drop since the gauge was created in 1990. It is an indication that hedge funds and other options investors are not expecting tremors in the market.

Ongoing discussions on raising US debt ceiling however could increase volatility to some extent. Still, it won’t invoke the kind of fear we have seen in the recent years. For instance, the VIX reached an all-time high of 80.86 in the two months after Lehman Brothers Holdings Inc. declared bankruptcy in 2008. Only a timely negotiation of a deal on debt ceiling along with optimism over global economic growth could cause volatility to stay lower for extended periods going ahead.

Below graph shows CBOE volatility index since July 2008

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