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Key to this trend is the behavior of volatility-targeting funds and options dealers. As market fluctuations have eased, volatility-targeting funds have transitioned to buying equities, with purchases totaling around $30 billion in the last week of November. If this trend of mild daily stock movements continues, these funds could inject an additional $21 billion into equities, potentially buoying the market further. Moreover, options dealers are currently net long on “gamma,” indicating a strategy that naturally dampens market movements, according to Brent Kochuba of SpotGamma.
Historically, once the VIX falls to such low levels, it tends to remain subdued for extended periods. This stability in market expectations of volatility has benefited those betting against it, with the 1x Short VIX Futures ETF (VIXY) significantly up for the year. However, some market analysts, like Eric Johnston from Cantor Fitzgerald, caution that the current calm could be a precursor to more significant market shifts. Notably, previous instances where implied volatility fell below realized volatility were often followed by notable declines in the S&P 500.
As the market heads into the final stretch of the year, these dynamics around volatility and options trading could play a crucial role in sustaining or altering the current trajectory of U.S. equities. Investors and analysts alike will be keenly observing these indicators to gauge the market’s direction in the coming months.
This article was originally published on Quiver Quantitative
