With the ASX rallying a huge 2.7% today, you’d be forgiven for thinking that the correction in stocks, for the Australian market at least, has found a floor.
Not so fast.
The chart below shows the VIX, commonly referred to as the “fear index”, which measures how much volatility traders are expecting in prices.
The VIX takes real-time quotes for ASX 200 put and call options, and combines them to produce an index of the implied volatility expected in the short-term.
“A volatility index at relatively high levels implies a market expectation of very large changes in the ASX 200 over the next 30 days while a relatively low volatility index value implies a market expectation of very little change”, the ASX explains.
The VIX being at an all-year high indicates that traders are paying more for option premiums – a bit like insurance premiums but for trading positions – in a more uncertain market environment.
In other words, the market doesn’t think this is over yet and there could be more wild swings – up or down – in the weeks ahead.