The long-slumbering Vix volatility index – which reflects the expected US stock market turbulence implied by option prices – has jumped above 15 today
Low market volatility now, but when it comes it could be huge
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We don’t have a VIX for that period, but we do have realized volatility on the SPX which can serve as a helpful proxy. T
The VIX rises to record levels and provides a dire Warning to investors: The Vega Of VIX ETFs Has Never Been Higher
With the VIX soaring, from lest than 10 yesterday to over 15, risk is suddenly breaking out above the crucial Kolanovic redline level…And Nasdaq is tumbling.
… it is worth reminding readers just how coiled the short-vol sector is, something we described two weeks ago in “If The VIX Goes Bananas” This Is What It Will Look Like” and in which a Morgan Stanley TRADER detailed how a devastating short vol unwind might develop:
A sharp rise in volatility could be driven by just a 3% to 4% one-day S&P 500 selloff. Right now the risk is greatest in the VIX complex, and demand for VIX FUTURES from three main sources could result in 100,000 contracts to buy in a down 3.5% SPX move.
For context VIX futures ADV over the last year is 230,000 (although vega) has risen to as high as 700,000 in big selloffs).
As MS’ Chris Metli further explained, should the S&P fall 3.5%, “first, the VIX could rise as much as 12 points. When volatility is low it tends to move a lot for a given change in the S&P 500. That effect is likely to be exacerbated now because a) skew is steep and b) many players in the VIX market are short. Taking these dynamics into account QDS estimates VIX could rise ~12 points for a 3.5% 1-day decline in SPX.”
He also notes that If the VIX rises 12 points, 1-month VIX FUTURES are likely up 5.5 points, a ~50% increase. The 1-day percentage change is a big deal in the VIX complex because the levered and inverse VIX ETFs and ETNs rebalance daily based on the percentage change, and some of the thresholds for forced unwinds are based on the percentage change.
This is the forced deleveraging scenario, where surging VIX forces vol sellers to unwind, and buy more VIX, creating a feedback loop, that Jeff Gundlach envisioned earlier this week.