Traders ‘Keep Head on Swivel’ With VIX Bets Rising Into Year-End
For a brief moment earlier this week, it looked like the volatility that’s gripped equity markets virtually all year was ready to recede. Four tumultuous days later, anxiety remains elevated, and traders are betting it’s going to stay that way.
Futures rose overnight into Monday after the presidential election was called for Joe Biden without much chaos at the polls. Then Pfizer Inc.’s vaccine trial data sparked a rally, sending the Cboe Volatility Index tumbling toward 20 — a level it last fell below in February. Late Thursday, the VIX was headed back toward 30. VIX futures are elevated, with the January contract the most expensive.
Traders hoping for a respite from whipsawing markets are now retrenching for a rough start to the year. Fresh restrictions across the country have overtaken vaccine optimism. On the political front, a divided Congress seems disinterested in delivering an aid package even as restrictions mount across the country. That’s driving up the cost to protect against stock turmoil to levels rarely seen in recent periods, ahead of Senate runoffs in Georgia early next year.
“We won’t know for another eight weeks, a period that encompasses the all-important year-end measuring stick for investment managers, which can lead to big positioning swings, or higher volatility,” Mike Wilson, chief U.S. equity strategist at Morgan Stanley, wrote in a note, calling the runoffs in Georgia a more important event than year-end. “We recommend investors keep their head on a swivel as this market likely has a few more cheap shots in it.”
This is shaping up to be one of the most volatile years in decades as the Covid-19 pandemic sent the economy into a recession. The VIX has stayed above 20 for 186 sessions, the longest stretch since the 2008-2009 run. The S&P 500 has moved at least 1%, in either direction, in 10 of the past 15 sessions, even as it sits near an all-time high.
The Cboe VVIX Index, a measure of implied volatility in VIX options, signaled traders are betting on wider price swings. For the 28th time since 2006, the VVIX climbed to a level that’s fives times the VIX. In previous instances, the VIX rose 90% of the time two months later, according to a study by Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.
The S&P 500 fell 1% Thursday as the U.S. recorded 145,000 new cases, roughly double the figures from just two weeks earlier, and three of the world’s topcentral bankers warned that the prospect of a vaccine isn’t enough to put an end to the economic challenges created by the pandemic. The benchmark rebounded Friday, trading 0.6% higher as of 10:250 a.m. in New York, and on track for a weekly gain of 1.5%.
“We are seeing large intraday and overnight moves in equities, and believe that risk-off will manifest more strongly and quickly in equities as developments in Covid cases put earnings estimates for next year at risk,” Cantor Fitzgerald & Co.’s strategists led by Eric Johnston wrote in a note. “With a myriad of looming risks, for those that need it, now presents a great entry point into year-end hedges.”
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