Major equity indexes experienced their worst weekly performance since June, with the S&P 500 shedding nearly 2% during Friday's session alone. However, the Cboe Volatility Index retreated from April highs to settle at 19.4, rising merely 2.2 points as demand for out-of-the-money puts evaporated across both the S&P 500 and the Nasdaq 100. This unusual calm occurred because institutional funds aggressively de-leveraged by selling longs and buying back shorts, reducing gross exposure and negating the need for portfolio hedges.
Key points
Active managers chose direct de-leveraging over purchasing protective index options durin…: Active managers chose direct de-leveraging over purchasing protective index options during the recent equity sell-off.
The shift toward holding cash has significantly suppressed typical volatility index react…: The shift toward holding cash has significantly suppressed typical volatility index reactions during major market drops.
A 2.2-point increase in the VIX was considered exceptionally subdued given that the S&P 5…: A 2.2-point increase in the VIX was considered exceptionally subdued given that the S&P 500 fell nearly 2%.
Sources checked by our analysis pipeline: 1
Stocks wrapped their worst week since June on Friday, but a group of the most sophisticated options analysts agree the reaction in the options market was oddly calm.
While the Cboe Volatility Index (VIX), often referred to as a so-called fear index, did touch its highest intraday level since April on Friday, it quickly retreated and closed at 19.4. Its rollover came even as the S&P 500 finished the day down nearly 2%. For that size of a decline in stocks, the 2.2-point move in VIX was "relatively muted," according to SpotGamma's Brent Kochuba, whose analysis suggests VIX should have jumped closer to 2.6 points, based on a study of 126 selloffs since 2018.
Even in the Nasdaq 100 Index, where implied volatility increased for most options contracts, there were key exceptions. Prices on put contracts that are between 20% and 50% out-of-the-money were higher on a volatility basis after the sell-off on Oct. 16, according to data shared by Nasdaq's Kevin Davitt.
So not only did traders not pile into S&P 500 Index options on Friday, they were also…
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