Is the VIX really broken?

A historical graph of VIX in the past year.
A one-year graph of VIX, the CBOE‘s volatility index.
Entrance into the Chicago Board Options Exchange
Chicago Board Options Exchange   Annabelle Ju/MEDILL

The Chicago Board Options Exchange Inc.‘s volatility index, long used as a “fear gauge” for stock traders, has lost some of its predictive abilities lately, but analysts insist it is not broken.

The volatility index, called VIX, measures the future implied volatility of options and futures contracts based on the Standard & Poor’s 500 Index.

The past few weeks have seen wide swings in stock prices, with the major indices setting record highs on Apr. 3, then falling sharply as investors fled popular high-momentum stocks like Facebook Inc. and Google Inc. Normally in that situation, traders expect to see the VIX rise sharply as stocks fall, but it hasn’t happened.

“VIX has gone into the low 20s but hasn’t gone to levels that indicate real panic,” said Russell Rhoads, an instructor with the Options Institute at the CBOE. For example, at the height of the 2008 financial crisis, the VIX soared to 89.53. Over time, it averages 20.08, according to Bloomberg data.

“There is a negative correlation between the stock market index and the VIX” usually, said Michael Gorham, director of the Stuart Center for Financial Markets at the Illinois Institute of Technology. “But you can’t expect a perfect inverse relationship.”

Considering the record volumes of VIX options and futures contracts traded so far in 2014, it’s a sign that people are still hedging market volatility with the VIX.

In the first quarter of 2014, the VIX traded 12.4 million futures contracts, up 35 percent from the same quarter last year and beating the record 11.5 million contracts traded in the second quarter of 2013.

The CBOE launched options trading for its short-term volatility index, VXST, Apr. 10 and it had a promising start. On its debut day, VXST trading volumes for options with weekly expirations totaled 3,134 contracts. On Apr. 15,volume in VXST options totaled 1,300 contracts.

“These volumes are very good for a new product,” said Gail Osten, spokeswoman for the CBOE.

The CBOE intends to keep rolling out volatility products: futures contracts on its 10-year Treasury note volatility index are scheduled to launch later this year. If all goes as planned, the index, VXTYN, will be the first of its kind based on the U.S. government debt.

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