Stock markets are reeling. Trading volumes are surging, and it’s a record-setting day for trading activity on the Chicago Board Options Exchange (CBOE). There is a palpable sense of investor panic in the air. Fear is back and volatility has hit extremes. It’s August 24, 2015.
A Far Cry from the Fifties
It’s interesting to note some of the similarities between early August 2016 and one year ago before a major spike in volatility. For instance, the CBOE Volatility Index (VIX) remains subdued and probing the lower end of its recent range. As you can see in figure 1, there seems to be little fear reflected in the “fear gauge” as it sits below 13 through the first few days of August. On August 4, 2016, it was also dipping below 13 and even probing multi-year lows.
Benign readings from VIX come as the S&P 500 (SPX) trades rather quietly from one day to the next and sits near record highs today. Of course, the SPX had a bigger range on Friday, following the better-than-expected labor report. But the average daily range, or the difference between a day’s low and high, in the SPX over the past 30 days is less than 8 points. That’s roughly half the range of the daily moves seen during the first six months of 2016! Likewise, July 2015 was a rather quiet stretch for stocks, as the SPX chopped higher for a 1.9% monthly gain.
With the benefit of looking back to last year, the low VIX in early August of 2015 signaled a period of calm before a volatility storm. After VIX fell to a low of 10.88, global stock markets faced two weeks of heavy selling fueled by a number of economic concerns. By August 24, 2015, VIX had seen a spike to multi-year highs of more than 53. Table 1 shows the extreme readings from VIX and other volatility indexes, as well as the recent readings in August 2016. Volatility is lower by a considerable amount across every asset class since the extremes of last year. This is intuitive, but the degree to which volatility is lower is quite amazing.
|Volatility Index||Symbol||08/24/15 (Intraday High)||08/04/16 (Close)|
Table 1: Then and Now. Volatility extremes in August 2015 and current readings today. Data source: CBOE. For illustrative purposes only. Past performance does not guarantee future results.
Pump Up the Volume
Although VIX is far from extremes, it’s near the same levels as a year ago. A round trip in 12 months. Additionally, it appears that trading volumes in the options market are similar today compared to just prior to the major spike in volatility in late August 2015. The CBOE reported last week that volume on its exchange, which is one of the largest of 15 different options exchanges, was 4.7 million contracts and down approximately 2% from July 2015.
By late August 2015, however, options volumes had surged. In fact, CBOE reported that Friday, August 21, was the busiest day ever for the exchange, as 11 million contracts changed hands! That, in turn, topped the previous one-day record set five years ago when 10.9 million puts and calls traded on August 8, 2011.
With eight trading days in the books, average daily volume on the CBOE in August 2016 is light at less than 4 million contracts. VIX is at the lower end of the 2016 range as well and obviously a far cry from the extremes seen in August 2015. However, trading was rather light, and the volatility index was near its bottom at this time last year as well. Then came the major spike.
In conclusion, it makes sense to stay vigilant during times of slow market action, as history shows that volatility is an unpredictable beast that can rear its head at any moment.
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