Trading Nation

No fear: Here’s why the VIX has cratered

The mystery of the low VIX
VIDEO4:4904:49
The mystery of the low VIX
Can oil drive the next leg of the rally?
VIDEO3:2403:24
Can oil drive the next leg of the rally?
Time to buy bank stocks?
VIDEO2:0002:00
Time to buy bank stocks?

The CBOE Volatility Index has staged a stunning reversal over the past few weeks, falling by about half as the uncertainty and volatility surrounding the Brexit vote dissipated and the climbed to record highs.

Stacey Gilbert, head of derivatives strategy at Susquehanna Financial, believes that the VIX has fallen to nearly one-year lows given that the U.S. market looks favorable compared to most countries' equities.

"We're the area [of the globe] right now that probably has the best outlook in terms of an equity valuation perspective," she said Monday on CNBC's "Trading Nation." "That kind of keeps us range bound in the S&P and that's what the VIX is going to measure. It's going to measure the potential for moves in the S&P 500."

The VIX is computed from the prices of options on the S&P 500, and for that reason, technically predicts the amount of future volatility. Yet since options are more frequently used to hedge against downside than to speculate on upside, the VIX generally measures investor nervousness; hence its nickname, "the market fear index."

In recent weeks, as stocks have climbed and the Brexit-centric volatility has dissipated, options prices are now reflecting a reduced predilection toward hedging — as well as a general belief that volatility will remain low.

But some see a VIX bounce back in the offing.

"I believe that valuations are stretched, I believe that global growth is going to continue to decelerate far more than expectations and the dollar will strengthen; therefore the feedback loop is that the VIX will start to glide higher again," said Stifel Nicolaus portfolio manager Chad Morganlander.

He recommends that investors look into commodities like gold at this time. The precious metal has traditionally been seen as a safe haven for investors.

The VIX ended Tuesday at 11.97.