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What’s lurking under the low Vix?


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What’s lurking under the low Vix?

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Complacent markets? Certainly, at first glance. The CBOE Vix index, otherwise known as Wall Street’s fear gauge, is sitting near or below 12 and has been for about two weeks. The last time it was at these levels for a prolonged period was in 2007.

And, yes, we all remember what happened.

Will Lloyd, managing director at VelocityShares (the company behind volatility ETFs) says that low levels of Vix are hiding something worrisome.

“The fact that the Vix is at such low levels does not mean that there is no fear. In fact, we see some signs that there could be market volatility in the future. The cost of being long on volatility has gone up.”

This refers to the curve or difference between one-month and two-months Vix futures contracts.

“At the moment, the cost of being long volatility in Vix futures is about 9% per month and the curve has been steepening.”

VIIX

“The fact that the premiums for hedging volatility market are rising sharply suggests that there is fear below the surface,” Lloyd said.

Michael Harris, an active trader and author of the Price Action Lab blog, has a different view about the low volatility. In fact, he disputes that it’s low and says it is actually high for this type of bull market:

“The annualized standard deviation of simple returns is 11.1% and much above the 1995 low of 8.28% and the 2006 low of 9.47%. Actually, based on these lows, the volatility is a little high for this type of bull market.”

Whichever way you look at it, there is almost an eerie uneasiness about calm stock markets.

What?s lurking under the low Vix? - The Tell - MarketWatch

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