What's With VIX?

VIX is the CBOE (Chicago Board Options Exchange) volatility index for S&P 500.  Only thing is, it's not really a volatility index but a "fear of the market going down abruptly" index.

VIX is calculated by using prices for out of the money call and put options.  If put prices are higher than calls it means there is greater demand for puts, i.e. more people are betting that the market will go down fast (options are wasting assets) and significantly (that's where the "out of the money" comes in) and therefore VIX is elevated.

Taking a look at VIX vs. S&P 500 I get the curious feeling that it is "too high" for the present bullish trend vs. the previous one (Chart 1).  During the 2019 S&P 500 uptrend which peaked at 3300, VIX was scraping the bottom around 13 points.  But in the current uptrend to the present 3900 high, VIX is bottoming out significantly higher, at 21 points. Why?

 

Chart 1 

The elevated VIX is telling us that put options are more expensive, i.e. there are more willing put buyers than sellers out there - supply and demand at work determining prices.  So who is buying puts?

That's the billion dollar question (forget million, the Fed has seen to it).  We may see the footprints in the snow, but we can only guess as to who made them.  My guess is that given the current retail speculator bull mania in everything (for example, weed stocks lit up yesterday - Chart 2), it's not your regular Joe/Jane individual retail plunger betting that the market will slump.  There must be some pretty sizeable and crafty bears out in them woods, or at least "real money" investors taking out hedge insurance against their portfolios.

 

 Chart 2 - Smoke 'Em If You Got 'Em

Final remark: professionals know that the "trend is your friend" and will not sell or go short until the market breaks. However, they also know that there's real trouble ahead when the little guy becomes uppity, believing he/she knows - fershure! - that he/she is much better at the trading/investing/speculating game than the pros. That's when markets are prone to break hard and fast - thus the "insurance" from puts.