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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.
 
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