Maybe the VIX's spike can benefit options traders after all...
Subscribers to Chart of the Week received this commentary on Sunday, March 8.
The current trade war rhetoric is impossible to escape on Wall Street, and has left investors mulling over subsequential volatility from major benchmarks. Options traders have been crowding into Cboe Market Volatility Index (VIX) bets, which has sent the market’s "fear gauge" to two 2025 records this week alone, the most recent on Friday to 26.56.
The VIX locked in its best week since Dec. 20, mere days after President Trump’s 30-day Canada and Mexico tariff delay ended. Canada retaliated immediately in response, implementing aggressive levies against most U.S. goods. More tariffs surfaced from the Trump administration against Chinese goods as well, handholding VIX call options to their highest trading volume since early September.
A VIX inversion curve -- when short-term contracts outflank long-term -- occurred this week after one the S&P 500 Index’s (SPX) three selloffs in the last five trading days. Options traders turning to short-term hedges is usually an indication market stress is surging off the charts. Post-Covid trading has manufactured only short-term inversions of VIX futures, as options roll up the price curve, versus down. The duration of this current inversion is a storyline to watch going forward.
The S&P 500’s just logged its worst weekly performance since September, and despite finishing Friday higher, the session also ushered in the SPX’s lowest level of 2025.
What does this type of performance usually mean for the S&P 500 and VIX in the longer term? Going back to 2010, Schaeffer’s Senior Quantitative Analyst Rocky White found every time the VIX hit 24 on an intraday basis for the first time in at least two months. The latest signal was this past Monday.
After these signals, the SPX has tended to outperform in the short-term (out to a month), compared to its usual returns since 2010. Three months later, the returns average 2.8%. As for the VIX (tables on the right), the VIX tends to move lower significantly after these instances, plunging an average 25.3% in the three-month time frame. In simpler terms, this looks bullish for the SPX and tends to lead to significant pullbacks for the VIX. However, there is an important piece of information omitted from the data below.
A signal that took place in February 2020 was overshadowed almost immediately by the Covid-19 stock market crash in mid-March. Once White pulled the above data without said signal, the S&P 500 showed a significant outperformance, jumping 3.6% after three months, while the VIX suffered a 28% selloff. An even more significant shift seems to take place in comparison to the previous data set, leaving more evidence that this fear gauge spike may not last as long as Wall Street anticipates.
On the heels of last week’s Canada and Mexico tariff retaliations, its understandable for investors to remain wary toward the future of U.S. levies and the widening gap of an extended trade war. But despite a historic reading in our pocket suggesting the current VIX pop will be short-lived, its likely to hang around for the near-term, so long as volatile levy action continues to inflate diplomatic tensions internationally by the Trump administration.