Stocks experienced their worst week since June, with the S&P 500 closing down nearly 2%. However, the Cboe Volatility Index (VIX), which measures market volatility, showed a muted response, closing at 19.4 after briefly reaching its highest level since April.
According to Brent Kochuba from SpotGamma, the VIX's 2.2-point increase was less than expected, suggesting that traders were not overly fearful despite the market decline. In the Nasdaq 100 Index, while implied volatility rose for most options, there were notable exceptions, indicating that traders were selective in their hedging strategies.
Nomura's Charlie McElligott pointed out that the lack of demand for S&P 500 puts reflects a calm investor sentiment. This could be attributed to asset managers opting to sell stocks directly rather than using options for protection. Morgan Stanley reported an 8% decline in total global gross equity exposure among long-short active managers, marking the largest drawdown in a decade.
Zed Francis from Convexitas noted that this de-leveraging suggests a shift towards cash positions, reducing the need for hedging and contributing to the subdued implied volatility during a period of market stress