VIX Experiences Its Largest Single-Day Jump in Five Years

Susquehanna International Group's options strategist Christopher Jacobson provided insight on the approximately 70% increase in the spot Volatility Index (VIX) that occurred on Wednesday. This increase represents the largest single-day jump in the past five years and the most significant rise since the "Volmageddon" event in February 2018.

Jacobson noted that the VIX rise on Wednesday was extraordinary not only in absolute terms but also in comparison to the magnitude of the decline in the Standard & Poor's 500 Index (SPX). During the same period, there were 32 declines that were more significant than the approximately 2.9% drop on Wednesday. However, Jacobson emphasized that each of these one-day declines began at a higher VIX level than the initial VIX level of 15.87 on Wednesday. This indicates that these sharper drops are typically expected to be greater than the sell-off on Wednesday and partially explains the VIX's more extreme reaction.

Jacobson also pointed out a notable increase in the VVIX reading relative to the spot VIX over the past week, indicating heightened expectations for volatility in VIX itself. Considering these factors, the VIX increase on Wednesday appears more comprehensible.

Sharp selling and low starting implied volatility resulted in the largest volatility-adjusted drop since June 11, 2020. On that day, there was a decline of approximately 5.9% or 4.1 standard deviations. This was the second most severe drop in the last five years compared to pre-session 30-day implied volatility.

Additionally, Jacobson explained that the increase in VIX/S&P implied volatility on Wednesday did not stem from suddenly elevated implied volatility levels in individual stocks, but rather from a rise in the implied correlation between these components. He had previously written about the historically low implied correlation environment and its effects on index-level volatility.

To illustrate this, Jacobson compared the SPY 90-Day Implied Volatility (IV) with the average 90-Day IV of the top 50 components. He noted that while SPY IV largely aligned with its position in December 2023, the average component IV was approximately 15% higher. The factor suppressing S&P volatility has been the historically low implied correlation. On Wednesday, these implied correlation levels jumped, resulting in a simultaneous increase in SPY IV.