Given the market volatility that ensued, the week following President Trump's Liberation Day (April 2nd) announcement will likely be well-remembered by most in the years to come. To the surprise of market participants, the tariffs announced by President Trump were far more significant than expected. Furthermore, while many anticipated a flat tariff, the individual country approach and the methodology behind it highlighted the material impact this chosen tactic would have on the global economy.
Against this backdrop, market uncertainty rose quickly, as observed from the Cboe Volatility Index® (The VIX® Index). The VIX® Index is based on real-time prices of options on the S&P 500® Index (SPX) and is designed to reflect investors’ consensus view of future (30-day) expected stock market volatility. As noted by Reuters, the VIX Index reached an intraday high of 60.13 recently – marking its highest point in eight months – before settling at 49.83. VIX Index levels above 40 are rare, occurring only 2.3% of the time since 1990, and typically coincide with major events. In the following days, U.S. equity and global equity markets declined markedly, reflecting the change in market sentiment and outlook for the worldwide economy. Market turbulence was further exacerbated recently by President Trump pausing tariffs on non-retaliating nations for 90 days, providing some respite to the markets.
Opportunity Arising From Volatility
While market drawdowns are a natural occurrence within market cycles, the impetus behind recent market activity stems from the U.S. administration’s trade policy actions, which are motivated by their desire to reposition the American economy. While it is instinctual for investors to take a ‘risk-off' approach during a volatile market, with many considering taking a position in cash or pivoting to low-risk investments, these periods can also bring opportunities. In deep market drawdowns, all asset classes are adversely affected; as such, many high-quality firms with strong fundamentals, stable earnings and robust financial health may now be trading at a discount to their fair-market values.
Utilizing Volatility As An Asset
Volatility can also be utilized as an asset by investors, allowing individuals to capitalize on the asymmetric market movements that arise during periods of stark market uncertainty. For individuals looking to add volatility exposure to their portfolio, Cboe Global Markets, Inc. CBOE, the creator of the Cboe Volatility Index, has several VIX-based investment offerings that allow investors to manage or gain exposure to the S&P 500® Index. These investment solutions include: VIX Options, VIX Futures, Mini VIX Futures and Options on VIX Futures. Though each offering's intended audience is distinct, the value proposition is consistent.
VIX Options are cash-settled, European-style settled derivative instruments with monthly or weekly expirations. Traders and investors can use these investment offerings to hedge against market volatility, speculate on future volatility or increase portfolio diversification.
VIX futures reflect the market’s estimate of the VIX Index’s value on various future expiration dates, enabling traders to speculate on or hedge future market volatility. Because VIX futures provide exposure to volatility independent of market direction, they facilitate both risk management and alpha-generation volatility strategies.
Mini-VIX futures are one-tenth the size of the regular VIX futures contract. However, they are intended to offer more flexibility in managing volatility risk and provide appropriate exposure when allocating among smaller managed accounts.
Options on VIX Futures, the newest addition to Cboe's VIX volatility product suite, provide greater choice for expressing directional views and managing equity market volatility exposure. Options on VIX Futures are contracts that represent the right, not the obligation, to either buy or sell a particular underlying futures contract at a specified price on or before a specified date, the expiration date. These follow a European exercise style, are physically settled and have P.M. settlement; most options on futures expire at the closing of the market on the last trading day.
A primary benefit of Options on VIX Futures is that they provide more "mid-curve style" exposure, facilitating a new and different payout profile. The mid-curve style exposure of Options on VIX Futures will also allow investors to take short-term views on the movement of forward volatility.
Looking Forward
The recent announcement by President Trump on April 9th, stating that he will pause tariff hikes for 90 days, was welcome news to U.S. equity markets, which resulted in a strong market rally to end the day and a fall in the VIX. However, the trade backdrop isn't fully resolved, as most countries will be left with 10% tariffs on their exports to the United States, while China – which had retaliated against Trump’s moves – will now face tariffs of 125%. The immediate takeaway is that though volatility has abated somewhat, we are still nowhere near our previous levels of stability.
Benefiting From Volatility
There is still much uncertainty regarding the Trump administration’s trade policy actions, which in turn influence market sentiment and expected volatility. However, traders and investors can use the investment solutions designed by Cboe to enact strategies such as volatility arbitrage or hedging portfolio risk. Furthermore, acquiring equity in well-established companies that are trading at a discount could also be a beneficial course of action.
For individuals interested in making the most of Cboe's investment offerings, The Options Institute is Cboe's educational arm that provides everyone from beginner options traders to professional traders a forum to familiarize themselves with foundational knowledge on options or learn new developments taking place within the investment derivatives landscape. The Options Institute provides comprehensive courses and tools, equipping investors with the knowledge to navigate the complexities of options trading effectively.
It is important to remember that responsible options trading is based on defining an investment objective and using analysis and informed decision-making to determine the most appropriate trading strategy. Understanding how options work and the associated risks, just like any other financial asset, is paramount for those traders adventurous enough to answer the siren call of turbulent markets!
Featured photo by Austin Hervias on Unsplash.
This post contains sponsored content. This content is for informational purposes only and is not intended to be investing advice.
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