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A market that is not afraid of anything - VIX dives below 12 points ahead of NVIDIA's results
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A market that is not afraid of anything - VIX dives below 12 points ahead of NVIDIA's results

created Daniel Kostecki22 May 2024

Investors will likely soon learn a hard lesson about this VIX volatility index, which is commonly called the fear index. The VIX index indicates how much volatility the market expects, based on S&P500 options, on an annual basis. Level 12 points means nothing else than the expectation that value will change S & P500 index may reach 12 percent in a year.

When the VIX index falls really low - as it is currently - the major stock indexes tend to reach new highs, and investors become greedy and, colloquially, see no danger on the horizon. Unfortunately, you never know how long this state of affairs may last, whether it is only temporary or a longer-term trend. However, it should be remembered that volatility is a sinusoid and periods of high volatility are followed by periods of low volatility, and periods of low volatility are followed by periods of high volatility. We are currently in a period of low volatility.

However, if the VIX started to return to even its long-term average at 14 points, it could probably lead to a correction to Wall Street. Volatility, of course, sometimes significantly exceeds the average level, which is caused, for example, by panic on the stock exchange in response to geopolitics, economic or company data.

VIX and options

For options-oriented investors, a low VIX means that ​​options on the S&P 500 and many of its component stocks are priced without premiums for fear and greed. Non-skewness - the difference between put and call volatility - is a big topic among options strategists and institutional traders. A flat deviation or negligible difference in call and put volatility suggests that investors are very bullish on the stock.

Uncertainty factors for the S&P500

Known unknowns that could cause crowd panic and boost the VIX include Wednesday's company earnings report Nvidia first quarter, the June 7 nonfarm payrolls report, and the June 12 Consumer Price Index report, which coincides with the Fed's interest rate decision.

If the reports cause the stock market to decline, investors should be ready to sell cash-secured puts at or below the stock price with an expiration date within a week or two. Applying this strategy to blue-chip stocks that you can own for several years, or preferably longer, monetizes the fear of the market crowd and ensures the options market pays you for long-term stock investing.

Throughout history, low VIX readings have preceded weaker stocks, and high VIX readings have preceded strong stocks. Adding this knowledge to your investing playbook should help you better cope with market volatility.

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About the Author
Daniel Kostecki
Chief Analyst of CMC Markets Polska. Privately on the capital market since 2007, and on the Forex market since 2010.