Traders Bet On Falling ‘Fear Gauge’

The volatility gauge tends to rise when markets fall and investors reach for stock protection through the options market. The VIX climbed to 82.69 Monday, topping its high of about 80 in 2008. After the financial crisis, trading derivatives tied to the VIX took off as people sought to profit from its swings.



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Many are wagering its recent jump won’t be long-lived. Betting on its fall through what is known as the short volatility trade has been particularly popular in recent years. This can be a risky tactic that backfires when stocks slide as sharply as they have in recent weeks as the spread of coronavirus has raised the risk of a recession.

As stock markets staged a modest rebound Tuesday, some of the most popular contracts were tied to VIX falling to 27 or 20, Trade Alert data show, closer to levels hit earlier this year when major indexes hit records.

Still, turbulence in markets has been high, triggering diverging views on the gauge’s path. Analysts at Credit Suisse Group AG said another steep selloff similar to Monday’s could push the VIX above 100. The S&P 500 fell 12% that day, one of the worst sessions in its history.

Some options traders have already been positioning for that, scooping up contracts tied to the VIX jumping as high as 100 or even 130, Trade Alert data show. Those are among the smaller positions outstanding but were some of Monday’s most popular trades, according to Trade Alert.

“While this is surely possible, we believe it is highly improbable,” wrote Jonathan Golub, an analyst at Credit Suisse.

Cboe Global Markets Inc., the exchange operator that oversees VIX options trading has added new strike prices—or levels at which options can be exercised—during the recent market tumult. Cboe added options with a strike of 100 on March 2 and more strikes were added the following week, a spokeswoman for the exchange said.






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