This article is written exclusively for Investing.com
The past few weeks have been very volatile for the stock market, with a sharp decline and followed by an equally strong rebound. To blame for all this volatility is rising interest rates, which have battered overvalued growth stocks, causing PE ratios to fall.
The push and pull of rising interest rates has left investors uncertain about what comes next. Some traders bet that uncertainty leads to more volatility. As a result, they are actively betting that the index will move to much higher levels by buying call options in the volatility index.
Betting on Rising Volatility
The VIX August 18 42.5 calls saw their outstanding interest rise by nearly 42,000 contracts on March 11. These phone calls were bought for more than $ 2.50 per contract. It would imply that the VIX will be trading above 45 by its maturity date in mid-August.
However, if the VIX sees a significant spike before August, it is likely that the value of the contract will rise much sooner, making profits well in advance of its expiration date.
There was also a significant increase in the April 21 VIX 60 calls on March 11th. Open interest rates rose by more than 26,000 contracts. These calls were bought for about $ 0.60 per contract and imply that the VIX will rise to those higher levels in just a few weeks. In addition, on March 10, the June 16 calls rose by more than 20,000 and were also bought.
The Lower End of the Range
It seems reasonable enough to make some optimistic bets on increasing volatility. The VIX has bottomed out several times in this 20 to 22 region since its March 2020 peak. In fact, the VIX has yet to return to pre-pandemic levels, suggesting that it could be the lower end of the trading range for the volatility index, at least for now.
The relatively large and noticeable calls being bought indicate that some are seeing a significant spike in volatility in the not-too-distant future. This would also suggest that the S&P 500 is likely to go lower due to their reverse relationship.
Higher yields will hurt growth
The technology sector and the booming parts of the stock market in particular have been hit hardest now that rates have risen. Their valuations and PE ratios have risen to much higher levels than in industries such as industry and energy. As a result, the richer valued growth areas of the market are most vulnerable to changes in Treasury market returns.
The market appears to be more unpredictable than at any other time in recent memory, with much of the $ 1.9 trillion in stimulus money set to flow into the stock market in the coming weeks. It could quickly help push the S&P 500 above 4,000 for the first time ever as the NASDAQ is sent back to its all-time high. But again, if interest rates continue to rise, it seems very likely that the stock market will have to price again, which makes the VIX bets even more intriguing.
