By Saqib Iqbal Ahmed
NEW YORK (Reuters) – Wall Street’s most-watched gauge of investor anxiety continues to retreat rapidly from panic levels, suggesting investors may be returning to strategies that rely on low stock volatility despite a near-collapse in stocks earlier this month.
The Cboe Volatility Index (^VIX) slid to 16.31 on Wednesday, its lowest level since the beginning of the month. The index hit 65 on August 5 and closed at 38.57, its highest level in four years, as investors shook markets by liquidating several large positions such as the yen-funded carry trade.
If the index level holds through the close, the seven trading sessions it will take for the VIX to return to its long-term median of 17.6 will be the fastest drop the index has seen in 35 years, a level associated with high levels of fear. Similar comebacks in the so-called fear index have taken an average of 170 trading sessions to occur, according to a Reuters analysis.
Some options experts say the rapid decline in the so-called fear indicator signals that investors have returned to strategies that rely on calm markets to generate profits. Among them is the dispersion strategy, in which investors seek to take advantage of the difference between volatility at the index level and the volatility of individual stock options, analysts said.
“What we saw (on August 5) was a unique confluence of events,” said Steve Sosnick, chief strategist at Interactive Brokers. “I think it’s also pretty remarkable how quickly everyone reverted to the same playbook that was working for them once it was established that these events seemed temporary.”
The S&P 500 index is up 5% from its Aug. 5 close, while the tech-heavy Nasdaq Composite is up 6% from the same day’s close. Both indexes are up about 14% for the year.
The sharp decline in the VIX also supports the view that last week’s record jump was driven by technical factors rather than long-term anxiety about global growth, analysts said.
The VIX, which is calculated from real-time S&P 500 options quotes, may have risen excessively due to less liquidity ahead of the August 5 market open, market participants said. The sudden break after months of calm in the stock market may also have caused some investors who had bet on options that markets would remain calm to rush to exit those positions, further amplifying the VIX’s rise.
“It was more about market structure issues… it was about short volatility traders being forced to close their positions when things were going badly for them, and it wasn’t really a true fundamental shock,” said Michael Purves, principal at Tallbacken Capital Advisors.
“If we had a rise in the VIX that was fundamentally driven by something really bad happening in the economy or in the world, then we wouldn’t see this kind of drop in the VIX from this high level,” Purves said.
(Reporting by Saqib Iqbal Ahmed; editing by Ira Iosebashvili and David Gregorio)
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