VIX Rises Sharply as Options Traders Anticipate Declining Markets

Joel Anderson  |

The CBOE Market Volatility Index, better known as the VIX, rose over 5 percent on Tuesday, carrying ETNs tracking the index with it. The increase takes the index closer to 15 and shows an increased anticipation of bigger market swings over the next 30 days by options traders.

However, the spike in anticipated volatility came as data was released from November that showed a dramatic decline in the trading volume of futures options on the index.

VIX Rises Again

The VIX rose almost 0.75 to approach 15, demonstrating an anticipated shift in the S&P 500 of 4.3 percent over the next 30 days. While this could represent either bullish or bearish sentiments on the part of options traders, increases in the VIX, also known as the “fear index,” typically indicate anticipation of a sharply declining market.

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The rising VIX carried the iPath S&P 500 VIX Short Term Futures ETN (VXX) , the most popular ETN or ETF tracking the index, up almost 4.75 percent on average volume. The iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) , which tracks anticipated volatility over four, five, six, and seven months, was also up, rising over 1.5 percent.

Declining Markets Have Options Traders Seeing Red

The S&P 500 declined for the second straight day on Tuesday, falling below 1,800 for the first time since since clearing that plateau on Nov. 22. The decline could be part of what’s fueling the expectation of more volatility in December. Given that the S&P 500 is up over 25 percent on the year, some traders may see equities as being overweight and are anticipating a market correction as investors start profit-taking prior to the end of the year.

Also contributing to declining markets could be disappointing early Black Friday numbers.

VIX Futures Options Volume Plunges in November

The CBOE released data on VIX futures options for November that showed 2.5 million total options written during the month. This represents a 40 percent decline from October, when congress’ game of chicken with the debt ceiling prompted the second busiest trading month ever for VIX futures. It is also an 8 percent year-over-year decline.

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