Dynamic Wealth Report | March 23, 2015
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How Is The VIX Reacting To The Fed Meeting?
By Gordon Lewis, Options Trading Research
 As an options trader, you can't understate the importance of volatility. You don't necessarily have to master the concept to be a good options trader. But, the more you know about the topic, the better off you tend to be.
As you know, overall market volatility is most commonly followed by watching the VIX.
As a reminder, the VIX (S&P 500 Volatility Index) is a measure of implied volatility levels on S&P 500 options. In terms of getting a snapshot of what volatility is up to (and how concerned investors are), you can't do much better than glancing at VIX levels.
VIX is popular because it measures the volatility of the most widely followed stock benchmark in the world, the S&P 500. It's also been around longer than any other volatility index (although it originally measured the volatility of the S&P 100).
For a more detailed description of VIX, you can check out the CBOE's main VIX page here. So how did the VIX react to the recent Fed meeting? Keep in mind, the March Fed meeting was one of the most widely anticipated meetings in some time. It's the meeting that was supposed to give us a real clue about the first possible interest rate hike in several years.
As expected, the Fed removed the "patient" pledge from the text. However, the rest of the announcement did little to suggest when rates will go up. In fact, the Fed doesn't seem any closer to raising rates than before.
Instead, the central bank has shifted the burden to economic data. Individual economic reports will now be the best way to tell how quickly a rate hike may be on the way.
For a closer look, here's the text of the Fed announcement.
To get an idea how the VIX reacted to the Fed meeting, let's look at the chart:
Basically, volatility (as measured by the VIX) rose into the Fed meeting. Investors were worried (or expected) the Fed to signal a rate hike in the summer. The VIX climbed all the way to the 50-day moving average prior to the meeting.
However, concerns seemed to have abated a bit right before the meeting. And, once the FOMC announcement was made, the VIX plunged to below 14.
So, what's it all mean? On one hand, the chart clearly shows the Fed meeting helped lessened the fear of a near-term rate hike. VIX dropping beneath 14 is certainly as sign of lesser investor concern.
On the other hand, I think the overall result is going to mean additional volatility moving forward.
You see, several economic reports have taken on a more significant role given the Fed's new stance. Interest rate projections are going to be entirely data based, rather than relying on clues from the central bank.
As such, we may see rising VIX levels heading into economic results. There then may be sizeable, immediate volatility moves once the news has been released. Then, the VIX will probably settle in until the next economic report.
If this pattern holds, there could be some excellent volatility trading opportunities ahead.
Yours in Profit,
Gordon Lewis
Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com. You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.
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