Persistently low levels for the CBOE VIX index are likely the result of investors piling into yield-enhanced exchange traded funds, according to the umbrella institution for central banks. The Bank for International Settlements, based in Basel, Switzerland, says in its quarterly report published Monday that a low VIX of late is unlikely to have been caused by retail traders’ predilection for buying short-term options and was instead caused by the popularity of structured products which offer higher returns to investors by selling options.
Options give investors the right, but not the obligation, to buy via a call or sell via a put, an underlying asset at a particular price within a certain time period. The CBOE VIX index
VIX
is a popular gauge of expected equity market volatility which is calculated from the cost of one-month options on the S&P 500 index
SPX.
At times of market stress traders tend to scramble for the protection that options provide, pushing up their price and thus raising the VIX. However, as Karamfil Todorov and Grigory Vilkov at the BIS note in their report: “The compression of equity market volatility throughout most of 2023 seems puzzling. Despite the prevailing uncertainty stemming from interest rate paths and geopolitical tensions, the VIX remained below its long-term average of around 20 for most of 2023.”
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Options give investors the right, but not the obligation, to buy via a call or sell via a put, an underlying asset at a particular price within a certain time period. The CBOE VIX index
VIX
is a popular gauge of expected equity market volatility which is calculated from the cost of one-month options on the S&P 500 index
SPX.
At times of market stress traders tend to scramble for the protection that options provide, pushing up their price and thus raising the VIX. However, as Karamfil Todorov and Grigory Vilkov at the BIS note in their report: “The compression of equity market volatility throughout most of 2023 seems puzzling. Despite the prevailing uncertainty stemming from interest rate paths and geopolitical tensions, the VIX remained below its long-term average of around 20 for most of 2023.”
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