Should investors take advantage of the low VIX ahead of FOMC? Should investors take advantage of the low VIX ahead of FOMC? Should investors take advantage of the low VIX ahead of FOMC?

Should investors take advantage of the low VIX ahead of FOMC?

Equities 5 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  In today's equity note we take a look at the low VIX Index and the recent substantial drop in the index to see what historical patterns in the S&P 500 suggest about the future. Historically the current setup has lead to S&P 500 future returns over 3-month and 6-month horizons that are lower than normal equity returns and also with a higher risk of larger losses. Combining this insight with the economic setup and the pricing the Fed's policy rate in the future we take a look at whether put options might make sense for protecting the downside risks to equities.

The potential downside risk to equities

Ahead of the FOMC rate decision tomorrow it is worth going into the helicopter to try to understand the bigger picture. Our Head of FX Strategy John H. Hardy has written his ideas about the FOMC here. If we start with the market pricing of the FOMC then the current pricing suggest that the policy rate is hiked by 25 basis points tomorrow and then starting cutting again in November as the market is betting on recessionary like conditions will warrant the Fed to cut rates this year. But what if inflation and the nominal economy is more sticky?

Today’s Eurozone core inflation figures for April are suggesting that inflation is more structural and will only gradually come down. Take a look at the 3-month average Chicago Fed National Activity Index (the widest coincident indicator on the US economy). This index is back to zero, indicating trend growth, bouncing back from some of the weakest activity levels observed since 2009 back in December. Financial conditions remain below the historical average relative to the strength of the economy and have trended lower in the past weeks. The initial big reset of the Fed’s policy path this year happened during the Silicon Valley Bank failure, but as time has gone by, it is clear that we are not facing a global systemic banking crisis but something that is more idiosyncratic and manageable. Add to this, that China has just said it will do more to stimulate, and we have Europe that will be forced to stimulate from the government side due to the war in Ukraine. Taking all these facts into account, the market may be wrong on the Fed and economy and that is the key downside risk to equities. Tomorrow we will know whether these concerns are justified or not.

If take a look at put options on the S&P 500 then the low implied volatility makes downside protection decently priced and especially if the market is mispricing the Fed and the economy over the coming months. Put options with expiry on 18 Aug and strike at 4,165 are trading around 129 which corresponds to around 3.1% premium. This premium should be hold up against that the S&P 500 is up 8.2% this year and the previous moves we have seen when inflation has negatively surprised or the Fed’s policy path has been dramatically changed. For the investor that has already got the market return or more, protecting the downside risk here could make sense as the market may have exhausted itself on the expected policy easing post the mini banking crisis.

S&P 500 Index | Source: Saxo

What does the VIX Index tells us about the future?

The VIX Index is currently trading around 16.6 down around 10 index points over the past 35 trading sessions. This level is quite below the long-term average around 20 and suggests that the options market is rather calm going into tomorrow’s FOMC rate decision. As we have outlined above, the market might not be accurately pricing the risk that the Fed once and for all tells the market that inflation is more structural and thus the policy rate will not be lowered this year. Regardless of the FOMC’s wording tomorrow on the policy outlook, we can always take the current setup and go back in time and see how the market reacted.

If look back as far as 1 Jan 1990 then there has been 78 cases when the VIX Index has been below 17 and dropped more than 8 index points in just 30 trading days. Measured on future returns across horizons of 1-week, 1-month, 3-month, and 6-month, then the S&P 500 Index is up on average across all horizons. This is not surprising given equities have a positive drift. But what if we subtract the drift? In this case the 3-month and 6-month horizons show significant underperformance relative to the normal drift with a statistical significance level of 0.5%. On the 3-month horizon the S&P 500 does 2%-point worse than the normal 3-month performance in S&P 500 when we have a compressed VIX Index below 17 and with a substantial recent negative change. Another way of looking at this is that the 25%-percentile on all 3-month future return samples is -0.0079% (so in 25% of the time the S&P 500 has a negative return of 0.0079% or worse) compared to -3.77% when we have the current VIX setup. These historical patterns can help inform the investor of the risk-reward ratio related to buying put options as discussed in the beginning.

Others have also previously been writing about the VIX level combined with changes in the index itself and have come to the same conclusions, namely that there are no strong one-dimensional signals in the VIX. It can add some information to the decision making process but cannot be the sole answer.

VIX Index weekly prices | Source: Bloomberg


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (
Full disclaimer (

Saxo Bank (Schweiz) AG
The Circle 38

Contact Saxo

Select region


All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.