VIX Spike

Equity market experienced some major corrections in response to credit stumbles in Jan, March and July this year, VIX spiked over 30% in both Jan 22 and March 17, but failed to close above this perceived extreme reading in the latest equity sell-off in last two weeks. Many market pundits were expecting to see the spike of VIX over 30%, and which were believed to be the indicator that the market finally reached "capitulation" point and hence short term "bottom." The 30% has been regarded as such an important bogey might come from the observations that VIX pierced through the 30% every time when S&P500 index went through risk repricing (corrections) process since last August (see the chart "Historical VIX and SPX" below.)



However, VIX didn't broke above this "magical" mark during the latest downturn (VIX did briefly touch 30% intra-day on 7/15 though), the final indicator for the market bottom. Most of other market sentiment indicators reached the historical extreme pessimistic readings, which lend the arguments that the markets have priced most risk and reach temporary bottom. If we examined the VIX option market, we might find the answer that market indeed in panic mood ("capitulation") but it was not reflected in the reading of VIX, but call options on VIX. The Bloomberg chart (red line represents the call volume on VIX and white line - VIX) below illustrates that the volume of call option on VIX peeked at about 269,000 contract on 7/15 since last year. Even though VIX is based on the options on SPX futures, market panic would prompt participants to purchase put options for protection and drive up VIX. Using call option on VIX may provide another efficient way to hedge the portfolio.