NEW YORK - Soaring volatility on Wall Street over a new coronaviruses variant identified in South Africa sent investors scrambling into defensive options plays on Friday and boosted Wall Street's most widely followed fear gauge to a more than two-month high.
The Cboe Volatility Index was up 8.37 points to 26.95, its highest since Sept. 20, as the S&P 500 index fell 1.9% with travel, bank and commodity-linked stocks bearing the brunt of the selloff triggered by the discovery of a new vaccine-resistant coronavirus variant.
It was the biggest one-day jump the VIX had logged since Jan. 27.
With puts on the S&P 500 Index and Exchange Traded Fund ETF logging heavy volumes, options traders loaded up on bets that offset further market declines.
Puts are a way to hedge against a drop in stock prices and give the right to sell shares at a fixed price in the future. Calls give the right to buy shares at the given price in the future and are usually used to put bets on bullish bets.
According to Trade Alert, puts on the S&P 500 index outnumbered calls 2 -- 1, the widest margin in about six weeks. The price of put options in SPY was also elevated.
Seth Golden, chief market strategist at investment research firm Finom Group, said that risk off, hedges on seems to be the sentiment.
The surge in volatility follows weeks of comparatively calm trading that saw the S&P 500 march to record highs, with stocks seemingly shrugging off concerns over soaring inflation, which could cause the Federal Reserve to normalize monetary policy at a faster than expected pace.
Steve Sosnick, chief strategist at Interactive Brokers, believes the severity of Friday's sell-off may have been exacerbated by investors unwinding one-way bets expressing the view that there was no alternative to stocks.
He said that those types of setups have a nasty way of reversing quickly.
Andrew Thrasher, portfolio manager for The Financial Enhancement Group, had been worried about recent gains in a handful of technology stocks with disproportionately large weightings in the S&P 500, including Apple, Amazon.com, Microsoft Corp., masking weakness in the broader market.
This set the kindling for sellers to push markets lower and the latest COVID news seems to have stoked that bearish flame, he said.
The VIX index is still well below its all-time highs of 82.69, which was hit during the market selloff in March 2020.
Ophir Gottlieb, chief executive of the Los Angeles-based Capital Market Laboratories, said a VIX at around 45 -- 50 would be close to panic.