00:07 Speaker A
Markets have been unusually volatile recently, as unpredictable and erratic as the weather itself.
00:15 Speaker A
And when the sky flips fast, you check the weather forecast. and in markets that forecast is the VIX, which is exactly what we’re breaking down on today’s stocks and translation along with options expiration, which is adding another dimension of odd wonkiness to market behavior.
00:29 Speaker A
First, let’s dig into the VIX, also called called the CBO Volatility Index. This is our main weather gauge for the market, and it’s calculated on options that trade on the S&P 500 about 30 days out.
00:43 Speaker A
Now, most retail investors operate on a much shorter time frame than that in the options market. So the VIX is more a measure of how much protection big money on Wall Street is buying.
00:52 Speaker A
As interactive broker Steve Sosnik likes to say, don’t call the VIX a fear gauge, the VIX is not necessarily based on emotions.
01:00 Speaker A
And when these big investors rush to buy protection, they’re seeing some weather patterns that might not be visible on the horizon.
01:06 Speaker A
And when they buy in mass, the Vic spikes, just like a storm warning might light up your weather app. There’s also a seasonal weather pattern to the VIX.
01:14 Speaker A
tends to be higher on average in October and November as that’s when we’ve seen some big swings historically. Now, let’s take a look at how the storm warning has changed over time.
01:25 Speaker A
And we got a chart here of the VIX going back to the beginning of the year. So this is year to date and we’re putting on a 50-day moving average as well, that is showing up in blue.
01:35 Speaker A
This smooths the VIX’s choppy and spiky price patterns. And you can see that big spike around liberation day in early April, earlier in the year, and recently we had a spike in mid October.
01:48 Speaker A
That was the China tariff scare. Now, the current spike just got a little bit bigger than that, but not nearly the size of that April spike. So we’re only expecting some squalls now, not a hurricane, though that can change quickly, just like the weather.
02:01 Speaker A
Now, look at that 50-day moving average and how it formed a sort of ceiling for the VIX after it calmed down in May.
02:07 Speaker A
Uh the Vix started using that average as a floor. That was a signal that the market patterns were changing, and we might expect more storms than usual, even on days and weeks when the sun pops out.
02:20 Speaker A
So now, let’s talk options expiration or opX and we have a handy guide for that right here.
02:26 Speaker A
Uh these days, we have options expiring every day of the week, but on the third Friday of each month, and that’s uh November, in November, that’s the 21st, we had the monthly options expiring.
02:37 Speaker A
And this is the one that you can see bigger marketwide effects at times because there’s a lot of money’s worth of options expiring.
02:46 Speaker A
Now, investors can buy options on indexes like the S&P 500 and individual stocks plus ETFs and futures. But index options usually set it settle at the market open on Friday, while the others usually stop trading after the market close.
03:02 Speaker A
Some of the heavy selling that we saw during the week was due to the buildup of index operation index options around certain prices. But as these bets and hedges roll off on Opex Day, and new contracts are written, this can be a sort of reset for the market.
03:16 Speaker A
Sometimes we also get some quirky activity on options days, but usually the indexes have lower volatility than usual. This happens as big stocks get pinned at certain price levels because of their own options activity.
03:28 Speaker A
Suffice to say, there is a ton of math involved and options are not for everyone, but it is helpful to know when there’s a possibility of a squall forming out of the blue.
03:37 Speaker A
So how do we use all of this uh heading into Thanksgiving week? First, we want to watch the market weather patterns and what they actually are.
03:46 Speaker A
Do daily stock swings start to shrink or do they stay big? What tells you whether the weather storms are moving out or still rolling through?
03:55 Speaker A
Then you got to watch the weather forecast. Does a Vix itself ease back down? That suggests that demand for protection is fading. Or does the Vic stay high, which shows that higher demand for protection by Wall Street is there.
04:08 Speaker A
And by pressing that a little bit further, we can also ask how the VIX is reacting around those recent highs and lows and how it behaves around that 50-day moving average. Is it spending more time above or below it? Because that can tell you when the forecast is changing.
04:22 Speaker A
It takes a while for the VIX trend to change, probably a little bit longer than a holiday shorten trading week, but if you keep an eye out on the VIX regularly, you’ll learn to start some early changes in its behavior. And the good news is, you can do all of this easily with the Yahoo Finance app or website.
04:36 Speaker A
So tune into the Stocks and Translation podcast for more jargon busting deep dives. New episodes can be found on Tuesdays and Thursdays on Yahoo Finance’s website or wherever you find your podcast.