Written by Suzanne Cosgrove and Matt Raebel
The pandemic of 2020 and its associated economic fallout pushed the Cboe Volatility (VIX) Index to record highs, and it’s expected to stay elevated even as COVID-19 vaccines are rolled out and dispensed and global economies begin to recover in 2021, two analysts said in a presentation sponsored by the Cboe Options Institute.
“In 2020, the S&P 500 experienced its second highest annualized realized volatility and intra-year high to low price range of the past 80 years, only behind the Great Financial Crisis in 2008,” said Stacey Gilbert, derivatives portfolio manager at Glenmede Investment Management LP. She said that coming off a year of volatility and options trading volume as high as 2020’s would make it unlikely for things to return to “normal” anytime soon. Historically, she said, “it takes about 8½ months for volatility to return to normal.”
Gilbert characterized a “normal” VIX Index as an average just under 20 — but the benchmark index has held above 20 for the past 10 months. In contrast, starting levels of volatility were about 50 percent lower in early 2020 — around 12 — than they are now.
Mandy Xu, chief equity derivative strategist at Credit Suisse, also noted that 2020 saw high levels of sustained equity market dispersion and sector rotation, a trend she said she expects to continue as 2021 unfolds. She added that she was “not expecting much” from the Federal Reserve as central bank policy makers keep interest rates low to stimulate growth, particularly in the absence of an increase in inflation over the near term. “If anything, more easing measures are possible if financial stresses re-emerge,” she said.
The combination of the election of Joe Biden as president of the United States and the elections in Georgia on January 5, which gave the Democrats a slim majority in the Senate, has long-term implications for the options markets, Xu said, because it will affect environmental policy, market regulation, and, more importantly, fiscal policy and the management of the coronavirus pandemic and vaccine distribution, all of which affect the markets. Before the pandemic, she said, the VIX typically closed at an average of 15 basis points, but her team projected a slightly higher average of around 17 or 18.
Xu noted that a sharp increase in retail participation in the options market supported higher volatility levels, particularly since much of that trading was in small lots and single-stock options concentrated in tech shares. That helps explain why the Nasdaq/S&P 500 implied volatility spread hit a 20-year high in August 2020, she said.
Overall options index volume was down about 4 percent for the year 2020, Xu said, while volume in single-stock options was up 56 percent year-over-year.
Even if the VIX does eventually normalize, it’s possible that things will never reset to the pre-2020 concept of “normal” again. In addition to the ongoing pandemic and the political situation in the U.S., the options markets themselves have changed. As Xu pointed out, retail volume, aided by retail trading platforms like Robinhood, E*Trade, and Charles Schwab, now accounts for 8 percent of all options volume. People who previously had little or no impact on the options markets began trading in huge numbers. That isn’t likely to change in 2021.