(Bloomberg) -- The Cboe Volatility Index closed at the highest level since April 2020, as a spiraling trade war pushed the S&P 500 to an 11-month low.
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Total put option volume rose to a record high as investors snapped up protection against further declines. The VIX ended the day at 45.31, a closing level last reached in the opening months of the Covid-19 pandemic.
While trading appeared to get more orderly as the session went on after sharp moves lower in the first half of the day, volatility remained high. The VIX — which measures expected 30-day volatility in the S&P 500 - remains elevated, underscoring the concern among investors that the stock selloff may persist. In August, by comparison, the measure reached 65.73 before falling back below 40.
“We’ve only reached these kind of levels of global risk pricing, really, during crisis periods,” said Stuart Kaiser, head of equity trading strategy at Citi. “That’s not necessary capitulation, but I think it does tell you that the market is in a stressed situation.”
A plunge in stock futures around 6 a.m. New York time when China retaliated against US tariffs caused the VIX to spike above 45, and it returned to that level after Federal Reserve Chair Jerome Powell said the central bank was in no hurry to cut interest rates. As in August, the initial market move was likely exacerbated by thinner liquidity before regular US trading hours.
Over the past year, periods of stress have been transitory, with spikes in August and December fading quickly once the forced buying was exhausted, as there’s a limited appetite for continuing to buy protection at higher levels if the market doesn’t keep swinging in a wide range.
Alon Rosin, head of institutional equity derivatives at Oppenheimer & Co. said investors who had hedged individual stock positions with index options have been especially hard hit by the market rout.
“We saw a lot of pain, a lot of forced selling,” said Rosin of Friday’s market action. “If your core hedge is on the index against high beta single names, it has been a brutal mismatch”.
The pain for traders has likely been amplified by the relative nonchalance in the market ahead of the tariff announcement late Wednesday. Coming into the week, S&P 500 options were pricing a bigger move for Friday’s non-farm payrolls than for tariffs.