Equity Convexity Bid As Traders Position for Powell Pivot

August 26, 2024

Link to Report: Macro Volatility Digest

WHAT STANDS OUT:

• The three most actively traded US broad market benchmarks decoupled from their respective volatility counterparts last week as quantified by the following week over week changes:

S&P-500® Index +1.45%, The VIX® Index +1.06 pts

Russell 2000℠ Index +3.58%, RVX Index +1.85 pts

Nasdaq-100 Index® +1.09%, VXN Index +1.17 pts

• In most cases, this counterintuitive and relatively unusual occurrence is primarily caused by a repricing of risk and manifests as a lift in the entire equity volatility surface. The main cause of last week’s decoupling, however, was precipitated by a bid for both upside and downside convexity (i.e., deep out the money options) in the days leading up to Jackson Hole.
• The net effect of the increased demand for convexity has been a 0.5% vol pt steepening in short-dated (1M, 25-delta) SPX skew. This steep skew (82nd percentile high) is in turn likely to stabilize vol of vol as we head into the long Labor Day weekend

Chart: S&P Index Up, VIX Index Up Due to a Bid for the Wings of the Skew

Source: Cboe

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