VIX Options Volume Reaches Highest Level Since March 2020 in June

More traders are betting on market volatility than at any time since the outbreak of COVID-19, possibly a sign of uncertainty bubbling under the surface of a booming market.

Investors traded an average of 850,000 VIX option contracts per day in June, the highest number since March 2020, when they traded an average of 1.1 million contracts per day.

The VIX, officially the Cboe Volatility Index, but also known as the fear gauge, is a measure of investors’ expectations of future market volatility, calculated from S&P 500 Index options price data. It usually moves inversely to equities, which it has this year. While the S&P 500 is up 14% since January, the VIX is down 37% to below 14. The historical average is between 19 and 20.

Excessive VIX options trading can be taken as a sign of market jitters. The only other month since the start of COVID-19 lockdowns in which VIX options volume exceeded 800,000 contracts per day was March this year, when regional bank failures drove volume up. On March 10, the day Silicon Valley Bank collapsed, more than 2 million contracts were traded. Daily volume averaged more than 1 million contracts for two consecutive weeks as other regional banks closed their doors and investors worried about contagion.

To be sure, the VIX is currently below its historical average of between 19 and 20, an indication of relative calm among investors. And private investors, an increasingly influential cohort in stock markets, are more bullish on stock returns than they have been since the Fed began raising rates last March, our latest sentiment survey suggests.

Still, the VIX’s put/call ratio also points to the expectation of greater volatility on the horizon. The inverse relationship of the VIX to the S&P 500 is why buying a VIX call option is often considered a sensible hedge against a short-term decline in the stock markets. The VIX’s put/call ratio currently sits at around 0.25, one of its lowest points in the past three years, indicating that investors are significantly more betting on a rising VIX than a falling VIX.

Investors’ VIX positioning could point to skepticism about this year’s AI rally, which saw a few Big Tech stocks rise above a more lukewarm market. Just seven stocks make up about 28% of the S&P 500Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Nvidia (NVDA), Alphabet (GOOG; GOOGL), Tesla (TSLA), and Meta (META) and their rapid increase this year accounts for the majority of index returns.

While limited market breadth is not in itself an indicator of bad times ahead, investors could draw comparisons between the AI ​​boom and past market crazes such as the dot-com bubble.

The rise in technology stock prices may seem unwarranted to some, especially given their sensitivity to interest rates and Federal Reserve officials who repeatedly say they are not done raising those rates.