2018: The year volatility came home to roost
NEW YORK: US stocks are down only slightly for 2018, but that masks a volatile year for investors.
Trade-related tensions between the US and China, weakness in the tech sector, concerns about slowing global growth and jitters about the Federal Reserve marching toward higher interest rates have kept investors on their toes.
Daily gyrations for the S& P 500 Index spiked sharply this year and remain near a one-year high.
One-month historical volatility – a measure of how much stocks have swung on a daily basis over the course of a month – has risen to 21 per cent, up from about seven per cent a year ago.
That jump has fuelled option traders’ expectations for future stock swings.
The Cboe Volatility Index, a widely followed barometer of expected near-term volatility for stocks, has logged an average daily close of 15.8 so far in 2018, up from 11.2 last year.
Option traders expect stock gyrations to persist beyond just the near term.
The VIX futures curve, which depicts prices of contracts of different expiration dates, is very flat, indicating traders expect the VIX will hang around current levels for the foreseeable future.
Speculators’ positions in VIX futures have also undergone a sea change.
Asset managers, leveraged funds and other reporting classes that make up the so-called buy side are net long VIX futures.
A year ago, they significantly net short.
US equity investors, who spent 2017 cocooned in one of the most tranquil periods in history, were jolted by the return of volatility.
The resurgence was so extreme it derailed several products that employed VIX futures.
Some VIX-linked products that thrived in the calm of 2017 went belly up, and the number of VIX futures open contracts logged its largest percentage decline in a decade.
The turmoil in equity markets has meanwhile spurred a rush of options trading and boosted US equity options trading volume to a record high year. — Reuters were