Stock Rout Shatters Years of Calm in Markets

Updated on
  • Some are seeking clues in rates for where volatility goes
  • Options are still trading mostly in lower strike ranges

The Cboe Volatility Index reached its highest level since August 2015 on Monday, sailing to its biggest increase on record as U.S. stocks extended last week’s meltdown.

The VIX more than doubled from Friday’s close, reaching 38.80 at its highest point before closing at 37.32. Those are staggering figures given the historically low volatility of recent years. Since 1990, the index’s average has been 19.3, but during the past three years of market calm, that number has been below 13.

Amid the quick pace of moves, derivatives trading seemed almost quaint. The most-active VIX options on Monday were at strike prices like 15, 22, 18 and 16. VIX February calls with a 30 strike price weren’t even in the top 10 most-traded contracts on the gauge.

“Positioning-wise, VIX actually looks pretty bearish, with open interest near an all-time high and put/call ratio near a low,” MKM derivatives strategist Jim Strugger said in an interview on Monday. “If/when 30-plus strikes start flying off the shelves would be notable. Even today, most activity is 23 and lower.”

Given that much of the talk about the drop in equities has gone back to bond yields, some were looking for the effect of rates on the VIX as well.

“History suggests that rapid increases in bond yields are often short-lived catalysts for a higher VIX,” Mandy Xu, equity derivatives strategist at Credit Suisse, wrote in a note Monday. “Once investors have had the chance to digest higher rates, equity volatility will quickly normalize.” She added, “over the long run, there has been zero empirical relationship between higher rates and higher VIX.”

The Merrill Option Volatility Estimate Index, which measures normalized implied volatility on one-month Treasury options, isn’t so far off its historical floor.

“Let’s assume this volatility is emanating from the Treasury market,” Strugger said. “Then it makes little sense to me that this event ends with MOVE just off of its all-time low.”

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