Well, it looks like the CBOE Volatility Index’s (CBOE: VIX) recent stubborn streak is over. With yesterday’s 16.76% rise in everyone’s favorite sentiment indicator, complacency may finally be squeezing out of the market as fear makes a bona fide comeback. They don’t call it the Fear Gauge for nothing.
Though it remains to be seen if the market is close to forming some type of sustainable short-term bottom, options trading investors looking for signs of such a trough now have one more piece of evidence in their favor. Remember, volatility is easiest to predict at extremes. When the VIX is fiddling around in the middle of a range it’s anybody’s guess as to where it will move. When stretched in one direction or the other its behavior becomes much more predictable. To help identify these extremes I’ve found the Bollinger Bands to be a very effective addition to the chart. Virtually every other significant low established in the market has coincided with some type of VIX spike above the upper Bollinger band.
The $64,000 question is whether yesterday’s pop was the beginning or the end of fear’s resurgence.
One thing’s for sure, those unhappy put spread sellers mentioned in my post Stubborn VIX Holding Back the Goodies are having their frowns turned upside down. The volatility surge has boosted the price of out-of-the-money puts making them a more tempting sell than any time over the past few weeks. Those who waited for a more significant spike in volatility before selling options have been rewarded for their patience.
At the time of this writing Tyler Craig had no positions on the VIX.
Follow Tyler Craig on Twitter@TylersTrading.