Vix Is Low, Time To Go?

The Chicago Board Options Exchange Volatility Index ($VIX.X) has been trending lower all year and hit a 16 month low today. Typically, the VIX moves inversely to the S&P 500. This is because the VIX, also known as the Fear Index, is a measure of options prices. When the stock market is moving consistently higher, and volatility is low, fund managers and traders are less likely to buy options to protect their portfolios, which drives option prices, and the VIX, lower.

The intuitive interpretation of a low reading on the VIX may be, "the stock market is going higher, volatility is lower, this is great." But professionals know that this combination of surging equity markets and a falling VIX should not be greeted with complacency, but rather with caution. There is even an old saying on Wall Street - "VIX low. Time to go."

The reason for this is that a low VIX reading and major gains in the equities markets can signal that the market is at an extreme. Stock market extremes are often followed by sharp corrections.

If you want to continue to buy into the current momentum in the markets, consider protecting yourself by simultaneously buying call options on the VIX. This way if the market does retrace, your options will increase in value, offsetting your stock market losses. The other advantage of this strategy is that you can stick with companies that you are bullish on in the long term without getting shaken out by near term volatility.