'Fear gauge' VIX is starting to attract hedges into historically volatile part of calendar

Investors are seeking greater protection against stock-market swings as markets approach a historically volatile period. The Cboe VIX, Wall Street’s “fear gauge,” measures expected S&P 500 volatility over the next 30 days through options prices. It generally rises when investors become more anxious and falls when markets are calmer. September and October typically produce some of the largest VIX increases after midyear declines. This seasonal pattern is coinciding with U.S. midterm elections, interest-rate risk linked to oversupply dynamics, hawkish central-bank impulses and escalating Middle East hostilities. Nomura’s Charlie McElligott described these pressures as a “negative risk trinity.” Equity investors “now have something to hedge against” after returning cash to markets, McElligott said. Investors are also paying unusually high prices for options protecting against a volatility surge over the next three months. The VIX three-month call skew is in the 91st percentile of its historical range, meaning such options have been more expensive only about 9% of the time. “As we move toward year-end, we anticipate higher equity-market volatility—both upside and downside—as rate expectations shift and cross-asset pressures build,” said Luke Rahbari, CEO of Equity Armor Investments. He added that Treasury-market stress is already spilling into stocks. The MOVE Index, which tracks expected Treasury volatility, remains elevated as bond investors reassess interest rates, inflation and the supply of U.S. government bonds. Equity Armor said the VIX and MOVE are signaling different risk stories across markets. However, CreditSights and Bloomberg LP data indicate that markets are not yet under unusual strain. Zachary Griffiths, CreditSights’ head of IG and macro strategy, said both MOVE and VIX are around their 10-year averages, while corporate credit spreads remain historically tight. Volatility could rise as markets leave the quieter summer period, although it may ease later in the year. James Ooi, market strategist at Tiger Brokers, said volatility typically declines in November. The VIX falls about 4% on average as midterm-election results reduce political uncertainty and clarify the policy outlook.