VIX closed at 19.4 despite S&P 500 falling 2% in worst week since June

The Cboe Volatility Index closed at 19.4 on Friday, marking a quiet reaction in the options market despite the S&P 500 ending the day down nearly 2%. Stocks completed their worst weekly performance since June, yet the fear index retreated quickly after touching its highest intraday level since April.

Brent Kochuba, a senior analyst at SpotGamma, described the 2.2-point move in the VIX as relatively muted. His analysis, based on 126 selloffs since 2018, indicates the index should have jumped closer to 2.6 points given the magnitude of the stock market decline. This discrepancy suggests traders were not aggressively pricing in further downside risk through index options.

Specific data from Nasdaq shows that while implied volatility rose for many contracts in the Nasdaq 100 Index, it did not apply uniformly. Kevin Davitt of Nasdaq noted that prices on put contracts between 20% and 50% out-of-the-money were higher on a volatility basis after the sell-off on Oct. 16. In contrast, Nations Indexes data indicates that puts in the Nasdaq were more expensive two weeks prior. Charlie McElligott, a managing director at Nomura, observed that out-of-the-money S&P 500 Index puts are not being chased into at this moment.

McElligott stated in a note to clients that index options skew has not been particularly reactive to the spot equities selloff. He added that where volatility has increased, it is partially because call volatility is decreasing. This selective behavior implies that investors are choosing specific hedges rather than broad protection.

Morgan Stanley's prime brokerage data reveals that total global gross equity exposure from long-short active managers is down 8% from its most recent peak. This represents the largest drawdown in at least ten years. Zed Francis, CIO of Convexitas, identified this as a massive de-levering event among institutional investors.

Francis explained that managers are buying shorts and selling longs, moving closer to cash rather than maintaining full equity exposure with options protection. He believes this shift in strategy is the main reason implied volatility has remained quiet during a month of increased stress. The reduction in gross exposure means fewer assets require hedging, dampening the demand for the volatility contracts that typically drive the VIX higher during selloffs.