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VIX May Still Be Too High: Chart of the Day

The stock-market volatility gauge known as the VIX may be too high even after dropping to a five-year low, according to Adam Warner, an option trader and contributor to Schaeffer’s Investment Research.

The CHART OF THE DAY illustrates how Warner reached his conclusion: by comparing the VIX, or the Chicago Board Options Exchange Volatility Index, with the SPDR Standard & Poor’s 500 exchange-traded fund’s volatility during the previous 10 trading days.

Yesterday, the so-called realized volatility for the S&P 500 ETF fell to 5.09, the lowest level since August. The VIX slipped 0.2 percent to 12.43, the lowest level since April 2007.

The VIX is “not as silly low as meets the eye” once the ETF’s lack of volatility is taken into account, Warner wrote in a posting yesterday on the Schaeffer’s Trading Floor blog. He trades options at Addormar Co. and is a former equity option market maker at the American Stock Exchange.

“Options certainly are cheap at these levels,” he wrote, referring to contracts on the CBOE index. “It’s just not some magical, fade-able moment here.” Instead, the gauge’s descent is part of a shift toward smaller price swings, he wrote.

Realized volatility on the S&P 500 ETF peaked at 21.5 on Jan. 2, the day after Congress reached a budget agreement that averted what was known as a fiscal cliff. The reading occurred two trading days after the VIX closed at 22.7, a six-month high.

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