Volatility Possible To Rise In The US Stock Market

This article was written exclusively for Investing.com.

The past few weeks have been extremely volatile for the stock market, with a sharp decline first, followed by an equally sharp recovery. The perpetrator of all this volatility was rising interest rates, which hit overvalued growth stocks and drove the price-earnings ratios.

The rise and fall in interest rates left investors uncertain about what the next move would be. Some traders think this uncertainty will lead to more volatility. As a result, these traders were actively playing to see that the index would jump to a much higher level by purchasing call options on the Index.

Bets on Rise in Volatility

VIX saw an increase of almost 42,000 contracts on 11 March at the level of clear interest in 42.5 call options on 18 August. These call options were purchased at premiums of over $ 2.50 per contract. This means there is an expectation that the VIX will be traded at over 45 by the deadline in mid-August.

However, if the VIX leaps significantly before August, the value of the contract could rise much sooner and make a profit well ahead of the deadline.

On March 11, there was also a significant increase in VIX 60 call options on April 21st. The level of open interest has risen by over 26,000 contracts. These call options were bought at around $ 0.60 per contract, which indicates that the VIX could rise to these highs in just a few weeks. Additionally, on March 10, call options from June 16 to 95 also rose to over 20,000 and these contracts were also purchased.

Lower Limit of Range

It seems reasonable enough to place some bets on an increase in volatility. VIX has made base in this 20-22 region several times since the peak of March 2020. The VIX has not yet returned to pre-epidemic levels, which could mean that this level may be the lower bound for the trading range of the volatility index, at least for now.

The relatively high size of options purchased indicates that some market participants expect a significant jump in volatility in the not too distant future. This also indicates that the S&P 500 is also likely to decline due to the contrast between them.

VIX Daily Chart

High Interest Rates Will Damage Growth

With the rise in bond yields, the index and especially the technology sector and the stock market were the regions of high growth that hit the biggest. The valuations and price-earnings ratios of companies in these areas reached much higher levels compared to sectors such as industrial products and services or energy. Thus, growth regions of the market with higher valuations became the most vulnerable to changes in interest rates in the Treasury bond market.

The market now seems to be in the most unpredictable conditions in recent history, with the bulk of the $ 1.9 trillion incentive likely to flow into the stock market in the coming weeks. These new incentives to flow into the market could help the S&P 500 surpass the 4,000 level for the first time in its history and help the NASDAQ reach new historic heights. However, if interest rates continue to rise, the stock market seems to need repricing, which makes VIX bets more interesting.

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