Even as the S&P 500 slid almost 2% on Friday, the VIX’s surge to its highest intraday level since April failed to ignite a wave of hedging activity.
Key points
- The VIX’s rise to an April‑high level was smaller than historical expectations for a 2% equity decline.
- Option traders showed selective interest, with out‑of‑the‑money puts priced higher but not broadly purchased.
- A sharp reduction in long‑short equity exposure suggests managers are selling stocks directly, dampening demand for volatility protection.
The Cboe Volatility Index (VIX) touched its highest intraday point since April on Friday before retreating to close at 19.4, a 2.2‑point rise that SpotGamma’s Brent Kochuba called “relatively muted” given the S&P 500’s near‑2% decline.
Historical analysis of 126 sell‑offs since 2018 suggests the VIX should have jumped closer to 2.6 points in a move of this magnitude, highlighting the unusual calm in the options market.
VIX jumps but closes modestly
In the Nasdaq 100, implied volatility rose for most contracts, but out‑of‑the‑money puts (20‑50% OTM) were priced higher on a volatility basis after the Oct. 16 sell‑off, according to Nasdaq’s Kevin Davitt, indicating selective hedging rather than broad panic buying.
Nomura’s managing director Charlie McElligott noted that out‑of‑the‑money S&P 500 puts “just aren’t being chased‑into at this moment,” and that index‑options skew remained largely unchanged, partly because call volatility was compressed.
Option premiums show selective buying
One explanation offered by market participants is that asset managers are opting to sell equities outright instead of buying options for protection. Morgan Stanley’s prime brokerage data shows global gross equity exposure for long‑short managers is down 8% from its recent peak—the steepest drawdown in a decade.
Convexitas CIO Zed Francis described the situation as a “massive de‑levering event,” saying that managers who have moved closer to cash have less need to hedge, which may be the primary driver behind the subdued implied volatility despite heightened market stress.
Reader questions
Why didn’t the VIX rise more despite the S&P 500’s drop?
Analysts compare the 2.2‑point VIX move to a historical average of about 2.6 points for similar sell‑offs, indicating that reduced hedging activity—partly due to managers de‑levering their equity positions—kept volatility lower.
What does “de‑levering” mean for market volatility?
De‑levering refers to asset managers cutting exposure to risky assets, often by selling equities and holding cash. With fewer positions to protect, demand for options as insurance falls, which can suppress implied volatility even when markets are falling.
Source: cnbc.com
