Stocks quoted in this article:

While 2013 may have looked like a terrible year for volatility, it was boom times for tradable volatility products.

This, from Matt Moran of the Chicago Board Options Exchange (CBOE):

VIX options established new record high levels for trading volume in each of the seven years since their launch in 2006. Average daily volume for VIX options rose from 442,959 in 2012 to 567,460 in 2013, an increase of 29%.

VIX futures also established new record high trading volume levels in each of the seven years since 2006. Average daily volume for VIX futures rose from 95,143 in 2012 to 159,498 in 2013, an increase of 67%.

Open interest in futures and options are a zero-sum game, so for every CBOE Volatility Index (INDEXCBOE:VIX) long, theres a VIX short. But the lions share of VIX trades get initiated on the long VIX side. So, as volume and open interest increase, bets on the VIX and essentially against the market increase.

And pretty clearly, those bets worked out quite poorly in 2013.

Now, VIX call buying doesnt cause a strong overall market, but its also pretty clearly not a sign of impending doom, as we so often hear and see on financial media. On the margins, its bullish, in my honest opinion. Its an indicator of sentiment, and in this small realm, theres clearly a demand to hedge against the strong market. Disbelief in rallies is good if you want the rallies to continue.

Not to mention, VIX call and futures owners now have ammo to trade into market selloffs, the same way put owners in indices and futures shorts can. The absolute numbers in VIX options and futures are relatively small, but dont forget this has a very high beta. Its still demand on the margins, but its there.

Of course, you can make the counter-argument, as well. The market has gotten off to a pretty blah start this year. If it continues, VIX call and VIX future shorts might actually feel pressured and have to start buying back VIX something or shorting stock futures or exchange-traded funds (ETFs) and its a Cycle of Panic!

But that day has not quite arrived yet.

Disclaimer: Mr. Warners opinions expressed above do not necessarily represent the views of Schaeffers Investment Research.