The market’s “fear gauge”—the Volatility Index (VIX)—is up 12.74% year to date. It sits right at 20 as I write.
Most analysts view 20 as the entry line for a “high-VIX environment.” It’s remained above 20 for all but a few days of 2016.
The Chicago Board Options Exchange (CBOE) calculates the VIX as a function of options prices.
Traders use options to hedge against uncertainty. They also use them to speculate on assets’ future prices. The higher the VIX, the higher options prices are.
The markets had been in a “low-VIX” (sub-20) environment for most of the last four years. But the VIX has jumped higher since the U.S. Federal Reserve’s decision to raise interest rates by 0.25% in December.
It was the Fed’s first rate hike since 2006. Investors’ fear of crashing global growth—combined with the Fed’s “hawkish” interest rate policy—has kept the VIX high.
Bottom line: A high VIX is “the new normal.” We expect it to remain elevated. Make sure you’re practicing strong risk management in your portfolio. Once you’re secure, use “instant cash options” to cash in on high options prices from persistent high volatility.