The latest example came on October 16, when the Cboe Volatility Index surged to a six-month high as the S&P 500 dropped just 0.6% on concern about loan losses at regional banks. The VIX move relative to that of the benchmark index was more extreme than during the vol spike of August 2024, the Volmageddon episode in February 2018 and the aftermath of the Lehman Brothers failure in 2008, according to UBS Group AG strategists.
By October 17, the VIX was back down to its level from days earlier, before US President Donald Trump started to upset markets with threats to impose higher tariffs on China. UBS strategists including Kieran Diamond highlighted that S&P 500 option market makers on Oct. 16 became shorter volatility as the market fell, which could have exacerbated the VIX jump as those positions were covered. Furthermore, dealers were probably short VIX calls and the hedging of those positions added to the spike.
To Bank of America Corp. strategists, the jump that day had more the hallmarks of a technically driven move, they wrote in a report. VIX exchange-traded products probably didn’t contribute so much because investors cashed in their gains while market makers covered their shorts. In a 10-point increase in front-month VIX futures, only about 17% of long holders of volatility securities would need to sell in order to offset the dealer rebalancing, the strategists noted.
The pattern of calm interrupted by volatility spikes also underscores a push-pull in the market exacerbated by the massive growth of ETPs.
