Courtesy of Bloomberg By Luke Kawa
June 11, 2019 — 7.17am
Remain vigilant. That’s the apparent message the Cboe Volatility Index is flashing, even as cash equities race toward records.
The VIX Index – often referred to as the market’s “fear gauge” – is up over the past three sessions, as of 1:40 pm. in New York. At north of 16, it’s implying that US stocks will tend to move more than 1 per cent per day over the next month. In recent years, it hasn’t lingered above this level unless equities were weakening.
The higher reading belied the brisk advance of more than 2 per cent for the S&P 500 Index over the same three-day stretch. It’s the first time implied volatility has failed to decline amid stock gains of this magnitude since 2009, when the bull market was in its infancy. The two variables tend to move in opposite directions.
During Friday’s 1.1 per cent advance in the S&P 500, the VIX – which measures the 30-day implied volatility of the S&P 500 based on out-of-the-money options prices – also moved higher. That’s despite the weekend effect that typically sees the gauge move lower on Fridays, and the passage of a market-moving event – the May non-farm payrolls report.
This marked just the 11th time since 2004 that the VIX advanced while the stock benchmark rose at least 1 per cent, according to Macro Risk Advisors derivatives strategist Vinay Viswanathan.
“The options market is unwilling to lower its pricing of risk further despite impressive market strength,” he wrote. “The stocks up/vol up move could be a sign from the option market that while equities were performing well, there is still plenty of risk worth protecting against (especially with China trade talks/G-20 lingering on the horizon).”
The event premium built into options that encompass the month-end G-20 summit – at which US President Donald Trump and his Chinese counterpart Xi Jinping are slated to talk trade – is off its recent highs, Viswanathan notes. He recommends July put options on the S&P 500 as an opportunity for investors nervous about the outcome to purchase relatively cheap protection.
Pravit Chintawongvanich, Wells Fargo’s equity derivatives strategist, said in a note that the fierceness of market rallies is contributing to firmness in the volatility index. For the most part, US stocks have taken the staircase down from a record close on April 30, and rebounded via the elevator.
“Up moves count as vol too, and have been pushing realised vol higher,” he wrote. “VIX actually looks low relative to realised vol.”
On Monday, the signal sent by a relatively muted retreat in the VIX appears to be a mirage linked to the demand for upside. The most heavily traded options are S&P 500 calls that expire on June 21 with strike prices of 2,900, 3,000 and 3,100. It’s an indication that fund managers who missed most of the 2019 might be looking for a way to get exposure to further gains without worrying about losses should equities reverse lower.