Investors Are Trading Volatility Options Like Nobody’s Business

Investors Are Trading Volatility Options Like Nobody’s Business
Reda Farran, CFA

5 months ago2 mins

What’s going on here?

Investors are on course to trade a record volume of options tied to the VIX volatility index this year.

What does this mean?

Volatility measures how much and how quickly the prices of assets move up and down. And the influential VIX volatility index – known as Wall Street’s “fear gauge” – shows the expected volatility in the US stock market over the next month. A low reading indicates that the markets are calm, while a high one hints at panic among investors. But the VIX isn’t just informative: investors can trade the index, letting them potentially cash in from their hunches about future volatility. So far this year, investors have traded an average of 742,000 options tied to the VIX every day. That’s more than 40% higher than in 2022, and beats the full-year record of 723,000 set in 2017.

VIX options volumes
Source: Cboe

Why should I care?

For markets: Investors’ cups are half empty.

“Call options” on the VIX – trades that pay off if volatility increases – have been especially popular this year. And because spikes in volatility often align with intense market selloffs, the interest in call options signals that investors are growing increasingly skeptical of this year’s stock market rally. The S&P 500 is up over 10% this year, after all, but investors’ moods are starting to sour at the prospect of economy-busting interest rates staying higher for longer.

Zooming in: Slow and steady doesn’t always win the race.

The VIX has been sitting unusually low for most of the year, leaving a lot of room for a hefty pickup that would benefit investors with call options on the index. But while the VIX does tend to rise when stocks fall and vice versa, that relationship isn’t guaranteed. The index is more likely to spike if stocks sharply sell off than if they post a slower slump, so buying call options isn’t a totally surefire way to hedge against falling markets.

VIX
Source: Google Finance
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