Swings

The CBOE Volatility Index (VIX) is seen by traders as a measure of market anxiety, often referred to as Wall Street’s ‘fear gauge’. On 5 August, it spiked 180% to a high of 65.73 – its largest ever single day jump. For context, that’s a bigger surge than when COVID-19 was declared a pandemic, February 2018’s ‘Volmageddon’ or even peak GFC.

While U.S. recession fears certainly caused much alarm and panic selling on the day, there was likely more going on here than meets the eye.

One reason for a potentially overstated VIX is the way it’s calculated. It measures expected volatility for the next 30 days based on pricing for options on the S&P 500. But if chaos erupts amid markets with lower liquidity, it could lead to bid-ask spreads (the difference between a buyer's highest price and seller's lowest price) so wide that it inflates the VIX.

Another theory is a high number of dispersion trades – a strategy that bets on individual stocks staying more volatile than the index. When short volatility trades had to be closed out, the VIX likely surged higher.

Options traders have all but dismissed the VIX’s big move as a head fake, and former Treasury Secretary Lawrence Summers wants the SEC to look into the illiquid instruments that drove the ‘artificial surge’.

Whether or not the move was authentic, it explains why the seven most valuable U.S. tech companies shed a combined trillion dollars in market cap. And why ETFs that bet on volatility started to get crowded.

The 2x Long VIX Futures ETF ($UVIX) saw record trading volume that Monday and on Wednesday the 7th, while ProShares Ultra VIX Short-Term Futures ETF ($SVXY), which bets on the return of market calm, had a similar uptick in activity.

Of course, volatility goes both ways: the most volatile stocks might see the sharpest declines when times are turbulent, but are also the biggest winners when things are moving up. Look no further than Nvidia ($NVDA), which has seen more than 19 moves greater than 5% in the last year. 

Eli Lilly & Co ($LLY) is another stock proving that a healthy dose of volatility can be just what the doctor ordered. The day it posted Q2 earnings ahead of expectations, it rallied over 10%. The firm reported US$11.3b in revenue for the quarter, hiking its EPS guidance for the year.

Big data firm Palantir Technologies ($PLTR) also ranks high on the volatility scale, with 33 moves greater than 5% this year. Most of them have been upwards: shares are 70% higher YTD. Its Q2 results are still fresh off the press, with net income up 376% YoY, and a partnership with Microsoft ($MSFT) has pushed it into the basket of stocks recovering the quickest. 

The VIX is sitting at around 15.88 and extreme volatility has tapered off. Is that good? That depends solely on your investment strategy.