VIX Volatility Index Remains Low

The VIX, a measure of expected market volatility, has been relatively low despite various risks, including earnings season and geopolitical tensions [1]. According to 24/7 Wall St, the VIX closed Friday at 18.71, which is at the lower end of its normal 15-to-20 range [1]. This calm is being tested by the current week’s mega-cap earnings slate, with options markets pricing sizable post-earnings swings for the mega-caps reporting this week [1].

Key takeaways

• The VIX has been slipping and sliding in April and is down about 40% over the past month [1].
• The index has refused to drift back to the low teens despite the S&P 500 sitting 5% higher year to date and the Nasdaq 100 up roughly 8% [1].
• Options markets are pricing sizable post-earnings swings for the mega-caps reporting this week, with total call premium in semiconductor options running 25% larger than put premium [1].

Understanding the VIX

The VIX, also known as the fear index, measures the expected volatility of the S&P 500 index over the next 30 days [1]. According to Heisenberg Report, the "low VIX" question is about the difference between the Quantitative Easing era and the current Quantitative Tightening reality [2]. Nomura's Charlie McElligott explains that in the QE era, the Fed told investors to be leveraged-long risky assets and bonds, so they needed to hedge those assets, resulting in a steep skew [2]. However, in the current QT regime, the Fed has been telling investors to not be long assets, and instead, sit on historically low net exposure and/or a historically extreme 'high cash' position, which means they don't need 'crash protection' [2].

Why it matters

The low VIX level is significant because it reflects a market that is paying up for protection while still buying upside [1]. As Heisenberg Report notes, the situation is not complicated, and the most straightforward explanation for the "too-low" VIX is often the best [2]. The VIX level will likely remain a key focus for investors, particularly with the busy earnings season and geopolitical tensions [1]. According to 24/7 Wall St, a clean print from the four mega-caps on Wednesday could collapse implied volatility quickly, while a miss or weak guide, paired with another oil surge, could push the VIX higher [1].