The VIX rose twice recently, and reached its peak as the NASDAQ Composite 100 fell. Thank you Koyfin for the visualization.
The VIX is the sense in the market of the future volatility. It drives the price of insurance (calls and puts) on major indices like the QQQ and SPY. I look at this like a cause and effect, but I might have gotten it backwards. I usually think that the VIX reflects nervousness in the market, fear of future volatility, and therefore it goes up, and then stocks react. It could be that way for some investors. Alternative Hypothesis: What if the cost of calls and puts goes up, because investors are buying more of them to hedge the market, or even to profit from a change in the market? What better way to profit from a sell-off than to buy calls and short the market (upside protection), or to buy into the market and buy puts to protect against a fall (downside protection). When we look at the attached chart, it looks like the market purchased more calls and puts, and drove up the price of insurance, then the market fell, the options blew out, and the price dropped again. As the price drops, and less insurance is purchased, the market rises again and the cycle continues. Not sure this makes sense in the real world, but the chart is a little too perfectly aligned to be a coincidence. VIX is low, market rises. VIX rises, market falls. This is only true in NASDAQ 100 and to some extent the S&P 500, but not the RUSSELL 2000. That market moves independently of the VIX, or if anything this last time it went up with the VIX. That could be a coincidence, or just market participants making two bets at once (sell the large caps while buying the small caps). Hope you liked this post. Comments and replies welcome.
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Stock Market BLOGJeffrey CohenPresident and Investment Advisor Representative Archives
January 2025
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