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Volatility Stable Despite Selloff

David Becker
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www.iforex.com

The VIX volatility index remained steady on Wednesday despite a market selloff that was led by confusion over comments from new Fed Chair Janet Yellen. The VIX measures the implied volatility of the S&P 500 index, for at the money calls and puts. This index gives traders an idea of how much option traders believe the market will move over a specific period on an annualized basis.

Yellens comments as they are now parsed by Fed watchers seem to have been taken very literally. The FOMC, in its statement said that there would be a considerable period between the completion of the asset purchases and the first increase in rates. When asked what considerable period meant Yellen responded by saying around 6-months. To market participants, this meant that 6-months after the bond purchase program ended, rates would increase.

Investors quickly adjusted their expectations. They quickly did the math and saw that interest rate futures were pricing in no movement until the 4th quarter of 2015 and quickly priced in these expectations. The market anticipates the FOMC completing the asset purchases in October. Yellen’s clarification points to a hike as early as Q2 15.

The VIX moved higher but held near the 200-day moving average and is relatively subdued despite short term interest rates moving up more than 10-basis points. This was the largest one day move for the 2-year yield in the past 2-years.

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