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What’s Up With Volatility

The current selloff in the S&P 500 started around February 19, 2025 from a level of approximately 6150, which was a record high. In a matter of less than a month the S&P 500 dropped to its level as of this writing of 5625, i.e. an 8.5% decline. The bottom of the recent decline was exactly 10% from the peak. Over the same period the VIX rose from just under 15 to a current value of 22, and a recent peak of 28. In other words, volatility has behaved very “nicely”, and there have been no panics (yet). For all practical purposes the “volatility beta”, i.e. a rough measure of how the VIX responds to the selloff in the equity markets has been very close to its rule of thumb of around 1, i.e. for each 1% decline in the S&P 500, the VIX rises about 1%.

Is this volatility move normal? Are there ways to implement tail hedging where for the same premium there are structures that respond more instantaneously and don’t depend on implied volatility as much as a put option. Of course, the most direct hedge against a selloff would be to short the market via futures contracts. But futures contracts can result in unlimited losses, so in our view should not be considered a tail hedge in the same way options should be. The whole idea of tail hedge is asymmetry – to gain disproportionately from large moves for a small, known-in -advance premium. Futures contracts do not let us create this type of asymmetry.

 

The full note on this important topic can be downloaded at this link: LTA Thinking – What’s Up With Volatility