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

Investors are starting to seek more protection against stock market swings as a historically volatile period for markets approaches.

One sign of that nervousness is emerging in Cboe's VIX volatility index. The VIX, often referred to as Wall Street's "fear gauge," measures the level of volatility investors expect in the S&P 500 over the next 30 days, based on options prices. It tends to rise when investors become more anxious about the outlook and rush to protect their portfolios against sharp market moves, and fall when markets are calmer. A higher VIX therefore generally signals greater uncertainty or fear among investors.

September and October tend to be among the months where the VIX jumps the most, after midyear drops. The seasonal proclivity, along with the U.S. midterm elections, interest-rate risk from oversupply dynamics, hawkish central bank impulses and an increase in Middle East hostilities in recent days, may be bringing investors to seek protection from what Nomura's Charlie McElligott referred to as a "negative risk trinity."

Equity investors "now have something to hedge against" after bringing cash back into the market, McElligott said in a note Wednesday. He noted that VIX three-month call skew — a measure of how expensive the options are — is in the 91st percentile, meaning it's relatively expensive to bet that U.S. equity volatility will rise over the next few months.

"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. There are already signs Treasury-market stress is beginning to spill into equities, he said.

The MOVE Index, a measure of Treasury-option volatility, has stayed elevated as bond markets continue to wrestle with shifting expectations regarding rate cuts, inflation and treasury supply, Rahbari noted.

Both the MOVE and VIX are around their 10 year averages and corporate credit spreads are historically tight, said Zachary Griffiths, Head of IG and Macro Strategy at CreditSights. He said volatility may be pushed even higher as markets move past the summer slowdown.

However, after that there may be some relief from market swings.

Volatility tends to ease in November, with the VIX falling around 4% as the midterm results remove a key political overhang and provide investors with greater clarity on the policy backdrop, said James Ooi, market strategist at Tiger Brokers.