The CBOE Volatility Index, or VIX, closed at its highest level in history Monday when U.S. shares finished with their steepest drop since the Black Monday stock-market crash of 1987. Now some investors are already betting on its rapid fall.
The CBOE Volatility Index, which analyzes the options markets to determine how much volatility market participants anticipate will occur in the near future, reached nearly 85. The index exploded nearly 25 points higher, or almost 43%, to finish at a record high of 82.69, surpassing the peak level of 80.74 on Nov. 21, 2008. The VIX has climbed to lofty heights as markets have sold off in a precipitous drop, entering into bear market territory as the coronavirus contagion continues to cause worldwide economic destruction.
By looking at different options and their prices, CBOE Global Markets can calculate a number that investors are implicitly using to guide their options trading. The higher the number, the more volatility or movement investors anticipate.
Stocks suffered a massive sell-off Monday with the Dow Jones Industrial Average cratering nearly 3,000 points, posting its worst day since the “Black Monday” market crash in 1987.
“It’s now apparent that we’re in the depths of the Covid-19 financial crisis of 2020, with much left to be written,” Jon Hill, BMO’s rates strategist, said in a note on Monday.
In addition to major levels of contraction, with the VIX trading under 15 prior to the market sell-off last month, part of the logic for this level of volatility is because there’s so much uncertainty concerning how long the outbreak will last and what its economic impact will be, according to Bill Miller, founder of Miller Value Partners.
“It reflects the uncertainty and potential impact of that range of outcomes,” Miller said in a note Monday. “When the market thinks the authorities don’t get it … the market reflects that immediately. When it believes proactive measures are being taken — Trump’s remarks [Friday] — that is quickly evident in the market’s reaction.”
Among the best performing non-leveraged ETFs of Monday, the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) increased 31.3%, ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) advanced 31.5% and VelocityShares Daily Long VIX Short-Term ETN (NYSEArca: VIIX) gained 32.1% while the CBOE Volatility Index jumped 32.8% to 76.8, hovering around its highest level since the 2008 financial downturn. Potential investors should keep in mind that VIX-related exchange traded products track VIX futures and not the spot price.
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