The Chicago Board Options Exchange Volatility Index (^VIX, 40.93, down 5.79) rose sharply on Monday as the stock market closed substantially lower.

The VIX measures “fear” on Wall Street and moves higher as the market moves lower. When Wall Street and traders get scared, they tend to trade more and volatility, along with the VIX, soars. When traders grow complacent and content, they tend to trade less and the volatility tends to trend lower.

As you can see, the market is higher this morning which means the VIX is trading lower. Yesterday’s jump marks the highest level of the VIX since 2002 and is only the fourth time the index has been this high. I had mentioned that the VIX could be headed for the 40’s a couple of weeks ago and now that we are here, we could go much higher.

The VIX spent 10 trading sessions in the 30’s and has now jumped into the 40’s basically overnight, suggesting Wall Street anticipates dramatic price swings in market. Although we are 52-week highs for the VIX, who’s to say we can’t head into the 50’s? If the bailout bill continues to drag, it will put even more pressure on the market to get something done.

Rick Rouse
Rick@OptionsMentoring.com

The Dow has fallen into negative territory once again after rallying over 200 points earlier this morning. Since its high of 11,800 at the beginning of the month, the Dow has fallen over 1,200 points with 800 of that coming this week.

I’ve been mentioning the VIX (VIX, 37.74, up 1.52) lately and for those of you new to the blog, the VIX is the CBOE Market Volatility Index that measures market sentiment. The market has had a lot of downward momentum and when the market goes down, the VIX goes up. The value of the VIX decreases when the market heads higher.

If the VIX is at 30 or more then it means the market is nervous which is currently where we are at. The VIX closed at 25.66 and the Dow stood at 11,421 last Friday. You can see the rise in the VIX as we headed lower on the Dow this week.

If the VIX is at 20 or lower then it means the market is confident. There are no real catalysts for the market to head higher until maybe when the election gets into full swing. It’s possible the VIX heads into the 40’s as we close out September and head into October. Company earnings will be coming out in a couple of weeks and you can almost bet we are going to see even more volatility.

Although the VIX is not a tell-all sign on where the market is headed, it can be a helpful tool. The market is not out of the woods and it will be interesting to see if we can hit the mid 40’s on the VIX. If this happens there will be plenty of opportunities to go long with call options on certain stocks and sectors.

Rick Rouse
Rick@OptionsMentoring.com

The market has been on a roll and it’s been a while since I have mentioned the VIX (^VIX, 21.32, up 0.18). Those of you new to the blog, the VIX is the CBOE Market Volatility Index that measures market sentiment. The market appears to be building momentum and when the market goes up, the VIX goes down. The value of the VIX increases when the market heads lower.

If the VIX is below 20 then it means the market is confident which is currently where we are at, basically. The VIX was at 28.54 on July 15 and the S&P 500 stood at 1,214. If the VIX is at 30 or more then it means the market is nervous. The S&P 500 is now at 1280 and the VIX is below trying to get below 20. See the correlation?

Although the VIX is not a tell-all sign on where the market is headed, it can be a helpful tool. Since the mid-July spike, the VIX has been trending lower as the market gains confidence. There are still plenty of headwinds the market faces but the VIX has room to move significantly lower from here which means the market could continue higher.

The Dow was facing resistance at 11,600, and that level was broken yesterday with the Dow closing at 11,615. The volatility is going to continue but bottoms in the VIX have generally occurred near the 16-18 area. The VIX will need to make it below 20 if the rally is going to continue. Otherwise, this could be a bear market bounce that we are riding higher.

I have to give it to the bulls though. After a triple-digit loss to start the session, the Dow in only 8 points away from making it into positive territory as we head to lunch.

Rick Rouse
Rick@OptionsMentoring.com

The VIX (18.90, up 0.72) or Volatility Index is a tool you can use to gauge market volatility. It is modeled after the S&P 500 and gives you an idea of investors’ confidence or non-confidence in the market. The key point here is that the value of the VIX increases as the market goes down and decreases when the market moves up. So if the market trades lower, usually the VIX is up. If the market is up, the VIX trades lower.

I mentioned last week that the market was testing its highs from January with the S&P 500 closing above 1,400. After three losing months to start the year, was April a harbinger? If so, it’s no coincidence that the VIX is below 20.

If the VIX is below 20 then it means the market is confident. The VIX was at 35 on March 17 and the S&P 500 stood at 1,276. If the VIX is at 30 or more then it means the market is nervous. See the correlation? Now that the S&P 500 is challenging its highs, the VIX is below 20.

So how low can the VIX go? Well the 52-week low is 12.43, and the 52-week high is 37.57. If the market can break through key resistance then the VIX is headed lower. No one can predict exactly what will happen in the market (although some claim to) but by using the VIX you can prepare for what COULD happen.

And yes you can trade options on the VIX. Options on the VIX didn’t start trading until 2006 but they have gained popularity in their short existence. Just to give you an example, I’ll use some June quotes since the May options are expiring soon.

June 18 put (VIXRS, $0.50, down $0.05)
June 18 call (VIXFS, $3.49, up $0.26)

As you can see with the S&P 500 trading lower yesterday, the calls traded HIGHER because the market was DOWN. It may take a while to get the concept down for those of you that have just been introduced to the VIX but just remember it’s opposite. Usually a call option will go up in value if the stock trades higher and puts will trade higher if the stock trades lower. With the VIX, if the market is down the calls are up. If the market is up, the puts are up.

Let’s watch the VIX over the next few weeks or months and see where it goes. You may have to wait until we get some more market extremes before thinking of using VIX puts but if the market fails at current resistance, there could be some buying going on.

Rick Rouse
Rick@OptionsMentoring.com