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Stock Market Volatility Is Likely To Surge

By Michael KramerStock MarketsMar 12, 2021 05:35AM ET
www.investing.com/analysis/stock-market-volatility-is-likely-to-surge-200566784
Stock Market Volatility Is Likely To Surge
By Michael Kramer   |  Mar 12, 2021 05:35AM ET
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This article was written exclusively for Investing.com

The last couple of weeks have been very volatile for the stock market, with a sharp drawdown in the S&P 500 followed by an equally sharp rebound. The culprit in all of this volatility has been rising interest rates, which have battered overvalued growth stocks, leading PE ratios to decline. 

The push and pull of rising rates have left investors uncertain of what comes next. Some traders are betting that that uncertainty leads to more volatility. As a result, they have been actively betting that the VIX index spikes to much higher levels by buying call options in the volatility index.

Betting On Rising Volatility 

The VIX Aug. 18 42.5 calls saw their open interest levels on Mar. 11 rise by almost 42,000 contracts. These calls were bought for more than $2.50 per contract. It would imply that the VIX will be trading at over 45 by the expiration date in the middle of August.

However, it is likely that if the VIX sees a significant spike before August, the value of the contract could rise much sooner, creating a profit well before the expiration date. 

There was also a significant increase in the Apr. 21 VIX 60 calls on Mar. 11. The open interest levels rose by more than 26,000 contracts. These calls were bought for about $0.60 per contract and imply that the VIX spikes to those higher levels in just a few weeks.  Additionally, on Mar. 10, the June 16 95 calls rose by more than 20,000 and were also bought. 

The Lower End of the Range

It seems reasonable enough to make some bullish bets on rising volatility. The VIX has typically bottomed in this 20 to 22 region on several occasions since the March 2020 peak. The VIX has yet to even return to pre-pandemic levels, which would indicate that, at least for now, this could be the lower end of the trading range for the volatility index. 

The relatively large and noticeable calls being bought indicate that some see a significant spike in volatility coming in the not too distant future. This would also suggest that the S&P 500 is likely to head lower due to their inverse relationship. 

VIX Daily
VIX Daily

Higher Yields Will Hurt Growth

The NASDAQ 100 and specifically the technology sector and high growth areas of the stock market have been hit the hardest as rates have risen. Their valuations and PE ratios have climbed to much higher levels than sectors like industrials and energy. That has left the more richly valued growth parts of the market the most vulnerable to changes in yields in the Treasury market. 

The market seems to be more unpredictable than at any other point in recent memory, with a large amount of the $1.9 trillion stimulus money likely to pour into the equity market over the next few weeks. It could quickly help to push the S&P 500 over 4,000 for the first time ever, while sending the NASDAQ back to its all-time highs. But then again, if rates continue to push higher, it seems highly likely that the stock market will need to reprice, and that makes the VIX bets even more intriguing.

Stock Market Volatility Is Likely To Surge
 

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Stock Market Volatility Is Likely To Surge

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Comments (11)
Christian Dariu
Christian Dariu Mar 13, 2021 3:34AM ET
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Of course the VIX will rise. IV is usually based on the past 52-weeks. Once the outlier move in March and April 2020 is being taken out the VIX will hike naturally but that has nothing to do with the economic situation... although I agree that a correction will come (but that also is also in the nature of the markets and healthy) with the stimulus and the tax postponed to june instead of april this is unlikely to occur before mid summer imo
Mart Bab
Rubberduck1973 Mar 12, 2021 12:29PM ET
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“with a large amount of the $1.9 trillion stimulus money likely to pour into the equity market“. I don’t understand. That money is going to people who desperately need it for food, rent, mortgage payments and local governmental organizations that are not going to buy stock. Why the assumption that the money will find its way to the stock market. This I just hopium. The stock markets has been climbing on this crazy idea and nobody cares about the real fundamentals. Big big bubble as a result
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Mart Bab
Rubberduck1973 Mar 12, 2021 12:29PM ET
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Chaidezjbs Henderson  well if I am out of a job, the money I get I am shore not going to spend it on things I want. I will hold on to it and spend it on stuff I really really need and hope that the job market gets beter in time. And that if even if I was able to pay my Morgan or rent
Mart Bab
Rubberduck1973 Mar 12, 2021 12:29PM ET
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Morgan = mortgage
Peter ONeill
Peter ONeill Mar 12, 2021 12:29PM ET
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Research has already shown that a very large % of people don't need help / have kept their jobs throughout the pandemic with high cash savings built up. With worries over inflation eroding cash values & most banks still offering very low-interest rates - Deutsche bank projects that up to $190 Billion of the stimulus (10%!!) will end up being pumped into shares instead. Overheating an already artificially high market.  This equals higher PE ratio values and a massive bubble forming which you can only presume will pop within the next 2-3 years once the artificial stimulus levels subdue and people see reality. Right now FARRRRRRRRRRR too much cash out there with SPACs, Cryptocurrencies & digital asset bubbles all showing the USA is already overheated and this $1.9 Trillion + proposed up to $4 Trillion for infrastructure + Fed monthly buying is pouring more gasoline on the fire. With huge debt + overheating economy...will crash at some stage just depends when not if.......
Diddl One
Diddl One Mar 12, 2021 12:29PM ET
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190 Billion? Thats just what Tesla alone goes up and down in a week. or Bitcoin in a day ( soon in a minute or two)
Robert Cox
Robert Cox Mar 12, 2021 12:29PM ET
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I think you've made the point for them. TSLA and BTC are two of the bubbles they were alluding to.
Tobechukwu Olumba
Tobechukwu Olumba Mar 12, 2021 12:23PM ET
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power surge for the markets this month.
Princess Oby
Princess Oby Mar 12, 2021 11:47AM ET
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the market will continue to move higher
Phil Kimmel
Phil Kimmel Mar 12, 2021 11:41AM ET
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The market will continue to rse over the next month. Think cash stimulus.
Chaidezjbs Henderson
Chaidezjbs Henderson Mar 12, 2021 11:41AM ET
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I truly agree
Mark Lohrmann
Mark Lohrmann Mar 12, 2021 11:41AM ET
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yes, just look at what happened in the Market after each of the previous stimulus injections the market went straight up
Peter ONeill
Peter ONeill Mar 12, 2021 11:41AM ET
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It probably will - until Democrats reveal their additional $4 Trillion infrastructure stimuli and how they need to fund it via increases in corp taxes. Plus inflation rips up national competitiveness/exchange rates. The USA already looks like will have $35 TRILLION in public debt by end of the year versus $5.5 Trillion at the turn of the century. US Corporate Debt is at a peak high as a % of GDP - same happened in 2001-2002 and 2007-2008 and we all know what happened next. Can see markets continue to rise, largely artificially propped up by all the stimulus, perhaps for another 12-18 months, but then in for a MAJOR correction if not crash....
Phil Kimmel
Phil Kimmel Mar 12, 2021 11:39AM ET
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I would suggest profit taking and day traders are more responsible for these swings than interest rates.
Wgdnanda Dias
Wgdnanda Dias Mar 12, 2021 11:33AM ET
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wgdnanda dias my win
Greg Cohen
Greg Cohen Mar 12, 2021 11:31AM ET
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Biden has been a disaster!
dean matthews
dean matthews Mar 12, 2021 11:31AM ET
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how
Shweta Gautam
Shweta Gautam Mar 12, 2021 10:46AM ET
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dollar is new waste paper
Scott Bailey
Scott Bailey Mar 12, 2021 9:26AM ET
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Bidens policy making is causing uncertainty! No one knows what his next mishap is going to be, total disaster and it only took a couple months!
brett fry
brett fry Mar 12, 2021 9:26AM ET
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This comment makes much more since if the first word is changed to Trump
Mart Bab
Rubberduck1973 Mar 12, 2021 9:26AM ET
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This comment makes no sense at all. Just bashing without merit
dean matthews
dean matthews Mar 12, 2021 9:26AM ET
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what mishaps. what disasters
William Smith
William Smith Mar 12, 2021 8:56AM ET
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It's all a scam based on unbacked paper printing.
Tana Tan
Tana Tan Mar 12, 2021 8:56AM ET
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Agreed. Will trigger equity market crash
Edward Chong
Edward Chong Mar 12, 2021 8:56AM ET
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a big correction is possible. but a crash is zero chance.
Thuan Bui
Thuan Bui Mar 12, 2021 8:56AM ET
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Edward Chong anything but constant bull
Peter ONeill
Peter ONeill Mar 12, 2021 8:56AM ET
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Edward Chong  Possible?? A correction is well overdue when you look at historic PE ratios + market mentality in areas like cryptocurrency, SPACs, recent IPO, meme stocks and digital content asset sales. Far too much cash is in circulation and only going to get worse
 
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