The volatility index, also known as the “fear index,” is intended to measure the implied forward 30-day volatility of the market by using at-the-money put and call option prices for certain stocks. But this begs an important question: how accurate is the index?
What To Know
The volatility index is not designed to measure fear in the market — it’s designed to “measure the amount of option premiums people are willing to pay,” Jeff Kilburg of KKM Financial said during a CNBC interview Thursday. It’s not designed to quantify the level of concern investors have with external potential disruptive events, like trade wars and tariffs, Kilburg said.
Case in point: the volatility index is trading near a 10-year low, which at first glance implies the market risk is similarly at a 10-year low. The answer is simply no, Kilburg said.
Why it’s Important
“I think it is a stark contrast,” Kilburg said of the VIX versus actual market risk. “It’s a suppression in the Volatility Index, or the suppression in option premiums due to the fact central banks continue to be in the cycle that ‘yes, we are moving toward quantitative tightening,’ but at the end of the day they have not really walked away from that support.”
The volatility index hit its lowest level in around seven years Wednesday and was trading lower by nearly 1 percent Thursday morning.
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