Stock Market Volatility Spikes to Four-Year High as Global Equities Plunge
A key indicator of expected volatility in the stock market, the Cboe Volatility Index (VIX), soared to its highest level in over four years on Monday morning, reaching a peak of over 65. This surge in volatility coincides with a sharp decline in global equity markets, sending shockwaves through the financial world. While the VIX has since cooled to around 38, it still represents a significant increase from its recent levels and its highest closing value since 2020.
Key Takeaways:
- The VIX, often referred to as Wall Street’s "fear gauge," surged to its highest point since the early days of the Covid-19 pandemic, indicating increased investor anxiety and market uncertainty.
- The initial spike in the VIX was driven by traders seeking to secure protection from potential further market declines, leading to a shortage of put options and a sharp rise in their prices.
- While the VIX has cooled from its peak, it remains significantly elevated compared to recent levels, suggesting that the market remains fragile and susceptible to further volatility.
- The spike in the VIX, however, doesn’t necessarily signal an immediate crash. Past instances of VIX spikes have been followed by quick rebounds in the stock market.
The "Fear Gauge" is Back
The VIX, calculated based on the pricing of options on the S&P 500, provides a gauge of the market’s expected volatility over the next 30 days. Its jump to over 65 on Monday morning marked the highest point since March 2020, when it reached a peak of 85.47 during the initial days of the Covid-19 pandemic. The VIX had been relatively subdued since the market recovered, often trading below its long-term average of 20.
A Short Squeeze on Put Options
Market analysts attribute the initial surge in the VIX to a short squeeze on put options. Put options, a type of derivative that allows traders to profit from a decline in the value of an underlying asset, experienced a surge in demand as market participants sought to protect their investments. The influx of demand exceeded the available supply of put options, pushing their prices up sharply.
Traders Seeking Protection
"It seems obvious, sitting where we sit now with VIX at 34-35 instead of 65, that we say an outside-of-regular-trading-hours squeeze. People were after those puts. They were chasing them. They couldn’t get them. They kept chasing them," said Jim Carroll, senior wealth advisor with Ballast Rock Private Wealth. This short squeeze, combined with the growing market uncertainty, fueled the spike in the VIX.
Zero-Day-to-Expiration Contracts: A Contributing Factor?
Some market experts speculate that the growth in trades of zero-day-to-expiration (0DTE) contracts may have contributed to the VIX’s recent subdued behavior. 0DTE contracts, which expire on the same day they are traded, offer significant leverage and potentially greater rewards, but also carry higher risk. Some believe that the increased use of these contracts has created a layer of artificial stability in the market, masking underlying volatility.
Past Trends: A Potential for Rebound?
While a high VIX can signify a potential market downturn, it is important to remember that spikes in the index are not always followed by crashes. Fundstrat head of research Tom Lee highlighted this point, suggesting, "You have to watch the VIX. When the VIX peaks and starts to roll over and fall down, the recovery can be just as quick."
Caution Remains
Despite the VIX’s cooling from its peak, Carroll cautions against viewing this as an "all-clear" signal. "If you just chopped off the long-tail at the top of the VIX candle right now and said, ‘Hey, we’re at 35.’ We’re at 35 relative to 23 on Friday’s close — that’s still a big move," he said.
The Future: Volatility Remains
While the VIX has cooled from its peak, it remains significantly elevated compared to recent levels. The market remains fragile, and the potential for further volatility persists. The recent events highlight the need for ongoing vigilance and a cautious approach to navigating the market landscape, particularly in times of heightened volatility.
