Why Everyone's Talking About the VIX and 50 Cent

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Tracy Alloway (0:25)

Thank you Hello, and welcome to another edition of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:30)

And I'm Joe Weisenthal.

Tracy Alloway (0:32)

So, Joe, we've been talking and writing about this a lot, which is kind of weird, because essentially, we're talking and writing about nothing. Like, nothing is happening in markets, at least when it comes to a very specific measure of volatility.

Joe Weisenthal (0:48)

Yeah, it's definitely, it's kind of like the Seinfeld markets, I guess, right, where the thing that's going on is that nothing is going on.

Tracy Alloway (0:58)

That's good. That's good.

Joe Weisenthal (1:01)

I just made that up. But no, you know, we've talked about this on this podcast before, how we have this, you know, we have a morning call that you and I participate on, that you lead very ably, I might add, where we talk amongst many of us in the newsroom about what's going on in markets, and every day it's like, kind of not much.

Tracy Alloway (1:22)

Yeah, every day the story is usually about how nothing is actually moving that significantly in markets. And the thing we look to when it comes to gauging market movement or market volatility is, of course, something called the VIX index, which occasionally gets called things like Wall Street's Fear Gauge. A lot of people take issue with that name.

Joe Weisenthal (1:46)

The VIX is one of these sort of technical things in markets that seems to have some popular currency. There are probably people who are sort of tangentially aware that this thing called the VIX exists.

But there's a lot of debate about what it really is. Most people probably have no idea how it's measured, whether it really signals anything useful about anything at all. And so in addition to being widely quoted and widely discussed, it's also extremely controversial.

Tracy Alloway (2:15)

Right. So today we are going to dig in to all the details about the VIX, how it works, but we're also going to dig into why market volatility is so low, as judged by this one measure. And I'm not talking about things like, oh, well, we have good economic growth, so people are relatively comfortable with their investment positions.

I'm talking about the actual market for trading volatility, because in many ways, volatility is now an asset class in and of itself.

Joe Weisenthal (2:45)

Right. This is an important concept that a lot of people talk about.

But a lot of these things are not particularly well understood. What does that mean, that volatility is an asset class? Or more specifically, what is volatility itself? We throw the word around a lot, but I doubt a lot of people really have a firm grasp of what that is. So I'm confident that our guest today is going to help us clear away the smoke on all these topics and actually shed some light on what can be a very confusing subject.

Tracy Alloway (3:16)

All right. Well, let's get into it. Our guest today is Profit Cinta-Wongbanich. He is head of derivative strategy at Macro Risk Advisors, and he writes about volatility on a basically every day.

Pravid, thanks so much for joining us.

Pravit Chintawongvanich (3:42)

Thank you for having me.

Tracy Alloway (3:43)

So, Pravid, let's start with Joe's question, because I think that's the big one, and it's the right one to be asking, what exactly is volatility?

Pravit Chintawongvanich (3:51)

So, when people talk about volatility, they're either referring to what we call implied volatility, so that's essentially the market cost of volatility, or what's sometimes called realized volatility, or in essence, which is how much our market's actually moving.

So, the VIX, which you guys have been discussing, is a measure of implied volatility. It's a measure of what people are willing to pay for volatility, or essentially, it's the market's gauge or measure of the cost of owning volatility.

Joe Weisenthal (4:21)

Let's dive into that a little bit more, that specific question. So, volatility, intuitively, is it just a measure of the degree to which markets are going up and down? So, it's not necessarily a directional idea, but if you imagine a sort of oscillation, or you imagine a sort of one of those EKGs that measures your heartbeat, it's kind of a measure of how dramatically the line is just moving.

Pravit Chintawongvanich (4:50)

Absolutely. And another way that volatility can be measured, or another thing that it measures, is the potential for large moves. So, for example, ahead of the US elections or ahead of the French elections, you also had volatility rise a little bit, not necessarily because people were expecting high volatility, but maybe because they were expecting one large move from a future event.