Volatility Spike Says Little About the Outlook for Stocks

The wild gyrations in capital markets in early February had a profound impact on investor sentiment. The spike in implied volatility, as measured by the CBOE Volatility Index, or VIX, roiled long-pacific markets, leading investors to question even now, almost a month later, whether a sustained selloff might be looming. According to signals from the options market, the answer is a definite no.

Options prices, which contain valuable near-term information about the market’s assessment of upside potential and downside risk, are showing average levels of risk for U.S. equities. As reflected in the figure below, rather than indicating rising risk of a substantial drawdown, options prices suggest more normal conditions ahead. That can be seen in the implied volatility of out-of-the-money puts1519918296892 on the S&P 500 Index, which reflect the price investors are willing to pay to protect against large losses. At a recent 16.1, implied volatility was near the median level of 16.57 over the past 10 years.