Les Billets de Monocle

It's all calm

04 May 2023


Above, in green, is the SP500 index, in orange is the implied volatility index (VIX), and in purple is the Open Interest on VIX futures contracts.

The VIX is calculated based on the expected volatility in the markets over the next three months. Historically, it has a mean-reverting property. So when it drops and reaches lows compared to previous months, a backlash should be feared. That is the case today. The index is at 16.57%, a level not seen since mid-2021 when euphoria was the main valuation parameter. It didn't go well afterward with the decline in 2022, and we can fear the same scenario this year.

The second indicator of euphoria is the Open Interest. It represents the sum of all open futures contracts in the Chicago market. Open Interest rises when participants believe that nothing significant will happen. Therefore, they start taking bearish positions on volatility. Without going into too much detail, we can see that we have just reached a new high compared to the previous month, with 359,000 contracts, and we are now reaching 2021 levels.

Should we be concerned? If the average volatility is significantly higher than what we observe today, at some point, there will be a need for higher volatility to return to that average. In the case of VIX, this doesn't happen through a gradual increase but through a sudden spike during a crisis. We have an example on this graph with March 2020.

We cannot predict the future. However, it is evident that the tension is building up, and the reaction could be powerful in the event of a shock.


This presentation is a promotional document. The content of this document is communicated by and is the property of Monocle Asset Management. Monocle Asset Management is a portfolio management company approved by the Autorité des Marchés Financiers under number GP-20000040 and registered with the ORIAS as an insurance broker under number 10058146. No information contained in this document should be construed as having any contractual value. This document is produced for information purposes only. The prospects mentioned are subject to change and do not constitute a commitment or a guarantee. Access to the products and services presented here may be subject to restrictions for certain persons or countries. Tax treatment depends on individual circumstances. The fund mentioned in this document (Monocle Fund SICAV) is authorized for marketing in France and possibly in other countries where the law permits. Before making any investment, it is advisable to check whether the investor is legally entitled to subscribe to the fund. The risks, costs and recommended investment period of the funds presented are described in the KIDD (key investor information documents) and the prospectus, available free of charge from Monocle Asset Management and on the website. The KIDD must be given to the subscribers before the subscription. Past performances are not a reliable indicator of future performances. Monocle Asset Management cannot be held responsible for any decision taken or not taken on the basis of information contained in this document, nor for the use that could be made by a third party. The investor may lose all or part of the amount of capital invested, as the funds are not capital guaranteed.

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