One Way GameStop Might Have Changed the Market
The VIX probably isn’t saying very much about fear anymore.
One of the big mysteries in markets this year has been the persistently high level of the Cboe’s Volatily Index, better known as the VIX.
Even as the S&P 500 touched all-time highs early this year, the VIX remained stubbornly elevated. For something that’s often been described as ‘Wall Street’s Fear Gauge,’ the index didn’t seem to be doing a very good job of matching actual sentiment in the market. So what gives?
Goldman Sachs analysts led by Ricky Fishman have a theory. They’re pointing to the recent explosion in retail trading of options. Aided by zero-fee brokers like Robinhood, retail investors have jumped head first into options, culminating in January’s GameStop drama where they used the contracts to push up the price of the videogame retailer. By Goldman’s estimates — which are based on retail brokers’ disclosures regarding compensation for order-flow — single-stock option volumes have jumped 130% between 2019 and 2021. In fact, they say, retail brokers handled 57% of total volume in non-index options in the first quarter of this year.
And because so much of that retail interest comes in the form of buying of call options, it can push up the VIX both through hedging demand of large dealers (who might buy implied volatility to offset the trades) or by creating a big price gap between prices for puts and calls.
As they put it:
In other words, no index is an island and the VIX might be getting pushed up by retail activity as much as worries over the future direction of stocks.
Check out the below episodes for more on the explosion in retail options trading:
Benn Eifert Explains How Retail Trading Is Rocking Markets like Never Before
How SoftBank and Robinhooders Added Fuel to the Stock Market Boom