The VIX, formally known as the CBOE S&P 500 Volatility Index, is a measurement of the premiums paid for options on the S&P 500. As such, it can be considered the premium that option writers demand to sell or buy stocks at a future date—which is itself a reflection of the market’s expectation of how much change they expect there to be in stock prices in the future.
While this technically means the VIX is a measurement of stock fluctuations, in reality it is often also a reflection of fear of unpredictable and violent changes in stock prices. Since sharp stock price changes are usually bearish (remember—stocks take the stairs up and the elevator down), violent changes in stock prices are usually bad. Hence the VIX is seen as a “fear” indicator.
In recent years, the VIX has spiked during key periods of market changes—but many young market participants simply lack the experience or historical perspective to know about these. Below is a really quick, succinct timeline of VIX spikes of the last decade and what caused them.
Late 2008 – VIX to 80
An unconceivable spike nowadays, the global financial crisis of late 2008 caused a huge volatility spike. The U.S. was in recession, there was a bank run, there was fear that more banks would go bust after Lehmann Brothers—a historical institution—shut its doors. It was as close to an apocalyptic event as imaginable. The VIX spike is pretty easy to explain.
May 2010 – VIX to 45
A short-lived event, this was the first “flash crash” that was attributed to high-frequency traders.
Not everyone remains satisfied with that explanation—some say it’s a result of the growing sovereign debt crisis in Europe and fears that the darkest days of 2008 were coming back. In reality, though, the crash was short lived, and stocks recovered within minutes.
August 2011 – VIX to 48
Political wrangling in Washington D.C. sometimes hits markets, and mid-2011 is a clear case. While the Tea Party and its sympathizers flirted with defaulting on U.S. debt—an unthinkable act, both then and now—the stock market quite understandably freaked out. S&P downgraded U.S.’s credit quality for the first time in history, and some Congressmen urged agencies to investigate S&P. Not America’s proudest moment. 2011 was the only flat year for stocks after the 2008-2009 disaster.
June 2012 – VIX to 26
The European sovereign debt crisis hits a crescendo, with open and rather dirty fighting between northerners and southerners threatening the cohesion of the EU. Few then would have predicted the first to disrupt the EU’s solidarity would be the UK, with Greece, Spain, and Portugal leading the charge to cede from the union.
October 2014 – VIX to 25
The oil crash of mid-2014 was entirely unexpected, and in its first months (July, August) was broadly seen as a positive—lower input costs for most of the economy would benefit everyone. This turned out to be the right interpretation, but for a brief time in October 2014 there was a fear that falling oil was the result of weak demand.
August 2015 – VIX to 36
After years of accommodative monetary policy from the Federal Reserve, Janet Yellen makes it clear that the Fed will raise rates soon. They did—in December of that year. But it was August when the market tried to front-run a sell-off in stocks, causing a sudden decline that caused the VIX to soar. This turned out to be a foolish error.
February 2016 – VIX to 25
The lowest point of the “correction” of late 2015-early 2016, February 2016 marks the point when selloffs were officially overdone in just about every asset class. It was one of the rare moments in markets when almost all Wall Street analysts were united in being bullish on everything: stocks, bonds, preferreds, real estate, high yield—you name it. Just about all of those asset classes would rise by double digits within a year of that low point.
February 2018 – VIX to 37
The most recent VIX spike was violent enough to kill many leveraged VIX ETPs, which had been identified as toxic (and avoided) by a majority of financial professionals long before. Sadly, the popular retail trade blew up in February—but few still know exactly why it happened.
Some argue that the trade shorting volatility got too crowded, and this spike was a natural unwinding. Others say it is the result of an overly complacent stock market forcing profit taking. Others still say it’s the harbinger of growing political and policy uncertainty from an unpredictable White House.
Eventually, we will probably come to a consensus on what happened, but for now it’s clear that the recent vol spike is one of a number of such events in history.