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Bets Are Rising On A Big Spike In The VIX That Could Rattle The S&P

By Michael KramerMarket OverviewJul 03, 2020 03:02AM ET
www.investing.com/analysis/bets-are-rising-on-a-big-spike-in-the-vix-that-could-rattle-the-sp-200529646
Bets Are Rising On A Big Spike In The VIX That Could Rattle The S&P
By Michael Kramer   |  Jul 03, 2020 03:02AM ET
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This article was written exclusively for Investing.com

The first half of 2020 was a roller-coaster, and based on options betting, the third quarter may prove to be just as volatile. In recent days there have been several bearish bets put on that suggest the S&P 500 could fall by about 7% before quarter-end.  At the same time, there is evidence that some investors are betting that, by the middle of September, the VIX could more than double in value and return to the peaks seen in March, as fear over COVID-19 gripped world markets and volatility surged to its highest in over a decade. 

That anyone should bet on a correction in the market should not come as a shock, especially given the gain in the S&P 500 of almost 20% in the second quarter. The significant advance for the index came rather smoothly, without much of a fight from the bears. Still, there are plenty of concerns on the horizon, such as rising coronavirus cases, which could easily and quickly derail the rally and some investors are preparing for this eventuality. 

Hedging Against A Drop In The S&P 500

On July 1, open interest for S&P 500 Sept. 30 puts at a strike price of 2,930 rose by 29,580 contracts. Additionally, puts at 2,465 for the same expiration date increased by 29,333 contracts, while Sept. 30 calls at 3,230 rose  by 29,373 contracts. The spike in open interest was the result of a put spread where a trader bought the 2,930 and 2,465 puts and sold the 3,215 calls, based on data provided by Trade Alert.

The trades would suggest that an institution is betting that the S&P is below 2,930 before or by the expiration date. It also assumes that the index is not above 3,215 by the expiration, after selling the calls. Overall, this is a bearish bet and suggests that the index will fall from its current level of roughly 3,130. It is also possible that this trade is part of a strategy through which an institution is trying to hedge its portfolio against a significant drawdown in the S&P 500 over the next three months. 

Volatility to Spike

Separately, there was a substantial increase in VIX options trading as well. Open interest for Aug. 19 70 calls by roughly 9,138 contracts on July 1, while open interest for Sept. 16 calls at 80 and 85 rose by 10,512 and 15,294, respectively. 

VIX options data shows these calls were bought, meaning the owner, or owners, believe the VIX will trade at, or above, 70 by the expiration date, up from its current level of around 27. It is effectively a bet that volatility will increase dramatically over the coming couple of months, and that could mean that the equity markets drop. 

The VIX has only ever traded above 70 during two periods in its near-30 year history—during the depths of the 2008/2009 financial crisis and in March this year, as the spread of coronavirus began to accelerate across the United States.

Daily CBOE VIX Index
Daily CBOE VIX Index

Risks on The Horizon

There are plenty of reasons for a trader or institution to place these bearish bets or protective positions, especially given the significant advance in the S&P 500 off the March lows and that it currently trades at around 20 times 2021 earnings estimates, marking a historical high. 

Additionally, coronavirus cases are once again on the rise, and despite many states reopening and businesses generating jobs. There are plenty of risks; as cases rise, states are now taking measures to try and control the spread of the virus. Investors may well be hedging against the prospect of more restrictions being imposed to slow the spread of the virus that could hamper the economic recovery.

Either way, the S&P 500 has had a fantastic move higher in the second quarter, and a pullback, along with some volatility, isn’t only natural, but it may be healthy for the long-term viability of the recovery. 

Bets Are Rising On A Big Spike In The VIX That Could Rattle The S&P
 

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Bets Are Rising On A Big Spike In The VIX That Could Rattle The S&P

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Comments (29)
Ram Chandan Chandan
RAMCHANDAN2019 Jul 06, 2020 12:30AM ET
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Do not write ****
Beast Mode
Beast Mode Jul 06, 2020 12:30AM ET
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Big time!
Ram Chandan Chandan
RAMCHANDAN2019 Jul 06, 2020 12:29AM ET
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Can you pick up trash?
Uri benassa
Uri benassa Jul 05, 2020 9:36AM ET
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You are all turning things upside down . The Vix doesnt spike by itself and doesnot effect the s&p its the other way , when the volatility in the S&P rises the Vix rises ... now in order to see again Vix values in the 70 etc , there should be a huge volatility that is driven only by a suprise , when people are really facing something that they did not imegined and trying to get rid of their investment snd run for safe haven of cash . This comes very rarly once in over 10 years and can never be forseen ...
Itsik Ovadia
Itsik Ovadia Jul 05, 2020 9:36AM ET
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Musical Critic
Musical Critic Jul 04, 2020 8:33PM ET
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Great observation Michael Kramer! It's coming and it's coming big this time.
Itsik Ovadia
Itsik Ovadia Jul 04, 2020 8:33PM ET
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Solomon Lalani
Solomon Jul 04, 2020 8:33PM ET
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Don't fall into the fallacy of buying vix - esp at this level - in the hope of SPX NQ DJIA major sell-off.  That is unlikely considering upcoming earnings season.
Tom Jones
Tom Jones Jul 04, 2020 8:33PM ET
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Solomon Lalani actually it is VERY likely to see a crash in the upcoming earnings season, as the market will expect substantially more guidance than it got in Q1 earnings reports when the market was handing out free passes. This time we expect to hear a LOT more info of what is happening on the ground, and it is not gonna be good. When is the next time people will feel safe flying, staying in a hotel, cruising, going to work or making a big purchase?
Solomon Lalani
Solomon Jul 04, 2020 8:33PM ET
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Tom Jones  Good luck!
Plopseven Schwartz
Plopseven Schwartz Jul 04, 2020 2:32PM ET
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Thats why CS delisted TVIX. They know after this weekend everything falls apart.
Saeed Zamanizadh
Saeed Zamanizadh Jul 04, 2020 2:32PM ET
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Hello
Luna Ley
Luna Ley Jul 03, 2020 11:33PM ET
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Dont fight Fed!
Beast Mode
Beast Mode Jul 03, 2020 11:33PM ET
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Damn straight if you want to trade against Trump's USD too expensive twitter rants, and the Fed's zero balance but infinite cheque book, then good luck to you. I have learnt the hard way myself.
Musical Critic
Musical Critic Jul 03, 2020 11:33PM ET
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This time around even trump won't be able to stop it with all his tweets & sweet$. It's coming down hard. Everything in place.
Beast Mode
Beast Mode Jul 03, 2020 11:33PM ET
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Musical Critic   Presumptions, wait for confirmation at least.
vipul makani
vipul makani Jul 03, 2020 7:56PM ET
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Buy it before fed buys it all, this fear stuff is for my puppies . ES will be 4000 by end of year
Jay Kost
Jay Kost Jul 03, 2020 7:21PM ET
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Good information to go with any number of bearish flash points. COVID-19, election, China/India/South China Sea, valuations, etc.
Solomon Lalani
Solomon Jul 03, 2020 7:21PM ET
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Yes, and all of those combined can't overcome Fed - the unlimited printing press!
Adamo Nals
Adamo Nals Jul 03, 2020 11:55AM ET
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None of you millennials could deal with a 3% fed funds rate which is agree just Lee low still. None of you could deal with the 5 to 6% 30 year mortgage rate which is basically free. None of you know what it’s like to trade in a stock market that goes down also. Most of your millennial institutional traders would not be able to pull out 2% for your clients in gains in a normal market
Beast Mode
Beast Mode Jul 03, 2020 11:55AM ET
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Do you know how to trade a stock market being stimulated by Trump?
Adamo Nals
Adamo Nals Jul 03, 2020 11:54AM ET
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Oh you millennials will learn who have only been trading from 2008 to 2020 what a real normal market looks like. A market goes up and the market comes down. It doesn’t just go parabolic forever. You will all learn a very hard lesson, but a good lesson. Markets work off of fundamentals and earnings. That’s how you price equities. Not based off of pulp and Seaside Heights carnival gamblers who make a joke of this market. It’s all coming to an end this upcoming week
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George Pichurov
George Pichurov Jul 03, 2020 11:54AM ET
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the upcoming weeks will deliver positive earning reports due to severely diminished wallstreet expectations. It'll be pretty nasty data, but better than expected, and this is the only thing millenials are interested to hear.
Tom Jones
Tom Jones Jul 03, 2020 11:54AM ET
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George Pichurov If Street projections are so diminished, then why are stocks priced at 20x 2021 earnings? A LOT of beats have already been priced in, and a lot of cold water will be thrown onto the mkts. Jamie at JPM will be casting the first stone.
George Pichurov
George Pichurov Jul 03, 2020 11:54AM ET
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Tom Jones  wаnkstreet does anything to keep stonks afloat.
Beast Mode
Beast Mode Jul 03, 2020 11:54AM ET
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How is it going? lol
Beast Mode
Beast Mode Jul 03, 2020 11:54AM ET
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Dude you have to learn about the power of the Fed's printing machine, Trump has turned it on its head LOL. I warned you! Hope you did not remortgage your home, and put it on a sell.
Lei Wen
Lei Wen Jul 03, 2020 11:19AM ET
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Fed + simulus + retail investors. buy the dips
Adamo Nals
Adamo Nals Jul 03, 2020 11:19AM ET
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You will learn as a millennial, markets go down and when they do after this insane lunacy they go down as a freefall not an escalator up. Shave off 500 S&P points and we will just be overvalued
Plopseven Schwartz
Plopseven Schwartz Jul 03, 2020 11:19AM ET
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Fed funds are slowly being reeled back. The dips you are buying are other retailers. This ends in catastrophe when the big bois pull out.
Down Shift
Down Shift Jul 03, 2020 11:04AM ET
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Yep, because President Trump has all the right economic policies and deals in place for a colossal economy, always has. COVID-19 just scared everyone, but after all these NON-social distancing protest, the far leftist and democrats can't even make that argument anymore. #WeBack #Trump2020
Down Shift
Down Shift Jul 03, 2020 11:04AM ET
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I bet none of you were complaining before COVID-19? Record high after record high. 😎 Over a 172 since he's been in office. So save your pouting don't hate. lol
Tom Jones
Tom Jones Jul 03, 2020 11:04AM ET
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You’re joking, right?
John Kochkerian
John Kochkerian Jul 03, 2020 10:55AM ET
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Do you think the Fed would let that happen?
Beast Mode
Beast Mode Jul 03, 2020 10:55AM ET
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If they did not want it to happen they could always increase interest rates and reduce their bond buying program? Just one of many tools.
Tom Jones
Tom Jones Jul 03, 2020 10:55AM ET
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Yes. The market isnt cheap right now, and they would let a 10% correction occur, as it should.
Joeri Willems
Jurinho Jul 03, 2020 10:48AM ET
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I'm pretty sure you read the data wrong. This trader probably sold the 3230 Calls, for about 85$ a piece, and ALSO sold the 2465 puts, for about 20$ a piece. With that money, he bought the 2930 puts at 80$ a piece. If you believe the market is overheating - which it is- then this trade will net you 85 + 20 - 80 = 25$ for each combo. Since he bought 29,000 contracts with size 100, that rounds up to a pure gain of 72,5 million.  The risk upside is that he needs to payout if the stock market keeps pumping upwards. At +10% from here, let's say roughly 3400 S&P, that is a cost of 493 million. Apparently this trader is confident it won't happen, or at least not until he sells them. The downward potential however is amazing. A S&P level of anything lower than 2930 will gain him extra money, up to a max of 1,348 million (at 2465)..  Round the numbers up, and understand the graph we see today, it seems this trade is risky but also has a high chance of success. And any down momentum will be big.
Peter Bu
Peter Bu Jul 03, 2020 10:48AM ET
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Agreed. Looks like a risk reversal trade.
Musical Critic
Musical Critic Jul 03, 2020 10:48AM ET
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Ok.. Reasonable argument. Point is, it is still expecting a bearish reversal. In your assumption the trader made $72mn in the beginning already, and more but limited till lower put strike. Whereas Michael's in assumption, the trader books has some initial cost but books profits when higher put spikes and then enjoys the lower put until S&P keeps falling lower & lower.
Tom Jones
Tom Jones Jul 03, 2020 10:48AM ET
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Musical Critic The trader didn’t “make” a dime until they close out the position.
Robert DZ the patterns
Robert DZ the patterns Jul 03, 2020 10:35AM ET
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If anything then maybe 3-4% dip and then another pull UP.
vipul makani
vipul makani Jul 03, 2020 9:25AM ET
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Nasdaq is going to 20K and TSLA 5k
Plopseven Schwartz
Plopseven Schwartz Jul 03, 2020 9:25AM ET
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Meanwhile, major class-warfare riots in every city on the planet.
Musical Critic
Musical Critic Jul 03, 2020 9:25AM ET
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Plopseven Schwartz Scary but possible.
Matthew Mover
Matthew Mover Jul 03, 2020 9:25AM ET
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That bear is going to loose big! If you haven’t learned by now the rich missed the bottom, so there using the media to pump out FAKENEWS to cause panic selling retailers. The CDC is helping them when they added probable COVID cases to count with confirmed cases. Read this from the CDC, {A COVID-19 case INCLUDES CONFIRMED and PROBABLY cases and deaths} {A probable case or death is defined as: A person meeting clinical criteria AND epidemiologic evidence with NO CONFIRMING LABORATORY TESTING PERFORMED FOR COVID-19; A person meeting presumptive laboratory evidence AND either clinical criteria OR epidemiologic evidence; A person meeting vital records criteria WITH NO CONFIRMATORY LABORATORY TESTING PERFORMED FOR COVID-19.} HERE IS THE CDC LINK https://www.cdc.gov/coronavirus/2019-ncov/covid-data/faq-surveillance.html
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John Kochkerian
John Kochkerian Jul 03, 2020 9:25AM ET
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Let me guess, MAGA lover?
John Dough
John Dough Jul 03, 2020 9:25AM ET
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Almost guarenteed, everything sedms to be “fake news” these days if it doesnt support your ideologys. Science has even become “fake news” which is sad.
Tom Jones
Tom Jones Jul 03, 2020 9:25AM ET
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You sound just like Trump. Please don’t parse covid infection data to make a bull case for the economy or a conspiracy. It’s bad news, just understand the science and trade it.
Sharon Ullman
Sharon Ullman Jul 03, 2020 9:25AM ET
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Justin Teubner   You are SO right! Many businesses are still shut down or, in states where COVID numbers are rising rapidly, are shutting back down. Sadly, many businesses will never be able to recover. The euphoria surrounding the stock market is irrational.
McKillin It
McKillin It Jul 03, 2020 9:25AM ET
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John Dough  Lol typical liberal spam bot blaming red states. Actually the cause in case spikes is from riots and "un"educated college kids thinking they MUST party during spring and now summer break, THEY are the problem.
Market Masta __
Market Masta __ Jul 03, 2020 9:18AM ET
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Bets are also rising that Jeffery Epstein's accomplice Ghislaine Maxwell will die in custody of ither Covid or Suicide. There is also a wildly 1500/1 that there will be a false flag attack that mainstream media will cover to shift the narrative off this crime syndicate.
Randy Stukes
Randy Stukes Jul 03, 2020 9:18AM ET
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Your foil hat is slipping, Alex Jones.
James Pattison
James Pattison Jul 03, 2020 9:18AM ET
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Not that fat fetched
James Pattison
James Pattison Jul 03, 2020 9:18AM ET
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Comsidering that ****we have already gone through its not that far fetched
James Pattison
James Pattison Jul 03, 2020 9:18AM ET
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The nexg likely events aimed at destroying the economy and reelection will be poisoning the water supply or a economic cold war with the communist chinese government... and the people are the victim
Ta Da
TDalt Jul 03, 2020 9:13AM ET
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That bear is going to be disappointed. We aren't going to freak out and panic sell again. Coronavirus is here to stay and people aren't as afraid come this second wave as some call it. We also are closer to solid treatments and the death rate has plummeted. Nearly 50% of all US deaths are literally from Nursing homes. Maybe if the media and governments shares that information instead of the fear mongering, we wouldn't have any potential for a panic sell off.
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Tom Jones
Tom Jones Jul 03, 2020 9:13AM ET
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The new cases are lots of young people who thought they were invincible and went out partying. They will be spreading the disease to the people at higher risk cuz it’s unavoidable. Wearing masks and maintaining social distance isn’t for the person doing it, it’s for OTHERS. People are so selfish, it’s all about them.
Jeffrey Whittinghill
Jeffrey Whittinghill Jul 03, 2020 9:13AM ET
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You are’nt the majority or the hedge fund that oversee 401k plans. They will move and have been moving out of equities and when it happens you will see the drop so keeo buying these overvalued stocks. Please
Musical Critic
Musical Critic Jul 03, 2020 9:13AM ET
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When the Fed moves out, so will u. But it would be too late and you wouldn't even dare to complain coz you had been warned, not by us here but by the Fed chairman himself many a times.
Plopseven Schwartz
Plopseven Schwartz Jul 03, 2020 9:13AM ET
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It’s not about afraid, it’s about value. Why would anyone pay 2-4c for the same company’s stock when their sales are down 30%+? This is shrinkflation: the act of getting less value for more money. This is the beginning of hyperinflation.
Tom Pym
Tom Pym Jul 03, 2020 9:13AM ET
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Plopseven Schwartz it’s all about afraid. The VIX is not an inverse SPX. It’s a volatility index. It can go down even if the S&P goes down as long as it’s not a flash drop. Hedge funds have been staying out but been doing slowly. Most likely to acoid that flash crash. A slow grind down will still see the VIX drop so those traders betting on the VIX shooting to 70 could still lose if the market grinds down slowly
Beast Mode
Beast Mode Jul 03, 2020 8:50AM ET
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I bet, with Trump devaluing the USD and the FOMC abusing their zero balance cheque book.
Richard Choa
Richard Choa Jul 03, 2020 8:43AM ET
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bulls and bears are always there. In the long run, bulls win.
Evan Ault
Evan Ault Jul 03, 2020 8:43AM ET
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amen to that brother
Tom Jones
Tom Jones Jul 03, 2020 8:43AM ET
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It depends on your time horizon and pain threshold. There a LOT of weak retail longs out there. Bears can (and have) make a lot of money, but mainly in shorter term trades. Even though the Fed is supporting the market they can’t protect it against sharp rapid drops and vol spikes. I’m in S&P Sept puts at 2800 cuz that’s when people (esp with kids in school) will start to panic and deaths will start to appear in the South based on infections today. It’s also a key support level.
Musical Critic
Musical Critic Jul 03, 2020 8:43AM ET
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The scale of this pandemic is ENORMOUS & FIRST in the history of mankind. It has the potential to turn RAGING BULLS into FIERCE BEARS!
Evan Ault
Evan Ault Jul 03, 2020 8:26AM ET
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who isn't hedged, at least a little bit, against a big drop at this point is the real question? bring on the volatility I say.. Thats where you make the money and it doesn't take a whole lot to buy some vix calls down the line that are still way out of the money right now.
Tom Jones
Tom Jones Jul 03, 2020 8:26AM ET
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A LOT of people aren’t hedged. All those big 401k accounts out there cannot truly hedge, cuz the only option available to them is a money market fund. They also have trading activity limits in those accounts, so they cant constantly move in and out of the market. There are many people who have a huge part of their retirement in 401ks, and not IRAs. Also, many people have no idea what hedging even means
Musical Critic
Musical Critic Jul 03, 2020 8:26AM ET
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Right. Hedging isn't very common among the common investor. Institutions usually have hedged portfolios. Even they aren't always hedged. And that is what increases volatility and the oncoming meltdown.Remember, the current situation is ONE-OF-A-KIND that has never happened ever before. So even the world's best analyst will not be able to tell for sure what lies ahead. Just exercise great caution - is all I can say.
Shahid Ahmed
Shahid Ahmed Jul 03, 2020 8:14AM ET
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I appreciate the assessment, very useful info.
Jeffrey Whittinghill
Jeffrey Whittinghill Jul 03, 2020 8:10AM ET
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🤫 let them keep buying
John Madden
John Madden Jul 03, 2020 8:02AM ET
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we are going to see a correction sometime in the near future. but not while Trump is president.
Tom Jones
Tom Jones Jul 03, 2020 8:02AM ET
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We have been preoccupied with covid and racial issues lately, and not the 2020 election. Even if Biden is ahead in the polls while Trump is still president, the market will drop because he has already said he will undo Trump’s Corporate tax reduction and increase the capital gains tax. Higher tax rates equals a higher P/E, implying a lower market.  Besides, does anyone not believe that if Trump loses the election, he will contest it and refuse to leave office? The plans to increase the allowance of write-in ballots will ensure this occurs.
 
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