Schnitger Corporation

Super-quick, the VIX volatility index is … crazy

I wrote about Bentley’s potential IPO a few weeks ago and mentioned that the company had, in its last possible IPO, told me that it looked at the VIX index to help determine the exact timing of a sale of its shares. Not going into that again, but this week’s sell-off in stock markets related to the coronavirus, COVID-19, has caused that index to go nuts. This is a screencap of the index today at 8 AM ET, from MarketWatch:

(Click on the image for an updated chart.)

You can see that on the day Bentley announced a possible IPO, February 14, the VIX stood at 14 or so. Right now, it’s at 39.40. The news reports I see refer to the VIX as the “fear index”, so I thought it worth a tiny bit of investigation. What is it? Who makes it? Why pay attention to it? Is it overreacting?

According to the Chicago Board Options Exchange (Cboe), which maintains VIX, it uses a formula based on option prices for the companies used to calculate the Standard & Poors (S&P) 500 index. VIX is the ticker symbol that, like the S&P 500, doesn’t represent an actual company but a basket of shares or options. Cboe says,

Volatility measures the frequency and magnitude of price movements, both up and down, that a financial instrument experiences over a certain period of time. The more dramatic the price swings in that instrument, the higher the level of volatility. Volatility can be measured using actual historical price changes (realized volatility) or it can be a measure of expected future volatility that is implied by option prices. The VIX Index is a measure of expected future volatility.

So, what does it all mean? That earnings reports coming out now caused investors to sell shares and that it’s harder to find buyers, even at lower prices. They’re selling because forecasts are uncertain: no one knows how widely COVID-19 will spread or how that will impact the production of iPhones in China, and their ability to be shipped and sold in shopping malls around the world. Closed factories lead to supply chain issues; no shoppers means no revenue. In all ways, not desirable.

According to all of the news reports I’ve seen, the VIX usually corrects itself as bargain-hunters start snapping up options. The last time there was a spike like this, in early 2018, the VIX closed at 37.32 on February 5, was back down to 15.80 by February 26, and closed below 15 on March 9. That’s a relatively quick return to calm. Why that all happened is far beyond my pay grade, and involves what type of options products are on the market, what the Federal Reserve signals and actual, real news from companies that make and do things. How quickly it stabilizes this time around depends on many of the same things — and on how quickly the COVID-19 crisis is resolved.

As for IPOs, I’m guessing they’ll be on hold until all of this flattens out. Companies need to be able to predict the price they can get for their shares to ensure the sale delivers the cash they need — and with volatility this crazy, that’s just too hard to predict.

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