Devendra Kumar
On Monday morning, the Cboe Volatility Index (VIX), a key measure of expected stock market volatility, surged to its highest level in over four years as global equities experienced a sharp decline. The VIX, also known as Wall Street’s “fear gauge,” spiked above 65, a significant increase from about 23 on Friday and approximately 17 a week ago. By noon ET, it had moderated slightly to around 32.
The dramatic rise in the VIX marked the highest level it had reached since March 2020, during the initial economic impact of the Covid-19 pandemic. At that time, the VIX peaked at 85.47 following the Federal Reserve’s emergency measures. The current spike, although notable, did not surpass the extremes of early 2020 but highlighted a significant shift in market sentiment.
The VIX is derived from the pricing of options on the S&P 500 and reflects expected volatility over the next 30 days. The sudden increase in the VIX on Monday could indicate that traders were aggressively seeking protection against market downturns, possibly transitioning from short-term to longer-term options due to high demand.
Since the initial COVID-19 sell-off, the VIX had generally been low, trading below its long-term average of 20. The rise in volatility may be influenced by the growing use of various derivatives, including zero-day-to-expiration contracts. Such spikes in the VIX often coincide with significant market drops but can also be short-lived and followed by a market rebound.
Despite the VIX cooling slightly during Friday’s session, its dramatic increase over the weekend and on Monday should not be seen as an immediate signal of market stabilization. Fundstrat’s Tom Lee suggested that while a decline in the VIX can signal a potential recovery, caution is warranted.
Jim Carroll from Ballast Rock Private Wealth noted that even though the VIX had moderated from its peak, the significant move from Friday’s close remains substantial and warrants careful observation.
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