VIX Declines as Stocks Climb

The Cboe Volatility Index (VIX), a key gauge of Wall Street's expectations for market volatility over the next month, fell on Thursday to its lowest level since February 14th. The decline came as stock markets approach record highs, fueled by strong jobs data.

The VIX dropped nearly 0.5 points from Wednesday's close, hitting an intraday low of 14.95 before rebounding to around 15. This suggests that some investors who had been betting on a decline in the S&P 500 are covering their positions.

'Volatility Buyers' Capitulating?

Specifically, traders known as "volatility buyers" – those holding positions that profit from falling stock markets or rising volatility – appear to be capitulating. "You can see some vol buyers are a little bit handcuffed here," said Kris Sidial, co-chief investment officer at The Ambrus Group.

Realized Volatility vs. VIX

Meanwhile, a retrospective measure of market volatility – realized volatility – has fallen even more than the VIX. For example, data from Cboe Global Markets showed that one-month realized volatility for the S&P 500 was just 6.9%.

According to Mandy Xu, head of derivatives market intelligence at Cboe Global Markets, "It’s not surprising to see VIX come down when the market is making all-time highs." She added, "Perhaps what's more surprising is that VIX isn’t lower, given how benign realized volatility is."

Expectations of VIX Spike in August

However, this low level of the index may be short-lived. Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, expects the VIX to rebound next month.

In an email, Wu noted, "While aggregate vol indices show a good amount of summer market complacency, it is worth noting that we tend to see VIX rise and equities fall in August."

On August 5th of last year, concerns about the unwinding of yen carry trades caused the VIX to spike from its five-year average of 20 points to 66 – levels last seen at the start of the COVID-19 pandemic.

Wu also pointed out that many seasoned traders are on vacation in August, and lower trading volumes can exacerbate market swings. She added, "Months with concentrated vacation time tend to create liquidity vacuums."

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