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VIX Fear Gauge Hits a Three-Month High, GameStop and AMC Fire Up Volatility

VIX Fear Gauge Hits a Three-Month High, GameStop and AMC Fire Up Volatility

Nick Cawley, Senior Strategist

VIX Analysis, Price and Chart

  • VIX surges nearly 40% on Wednesday as speculative mania soars.
  • Retail traders upsetting the status quo.

The VIX fear gauge shot into life yesterday and jumped by around 40% on the day before nudging lower in early European trade today. The Chicago Board Options Exchange Volatility Index – VIX – is a ‘calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of S&P 500 Index call and put options’. A rising VIX warns of heightened volatility ahead, and yesterday’s move sent the gauge to its highest level in three months.

A Guide to S&P 500 VIX Index

A cluster of previously unloved US equities are now the new media darlings as a wave of concerted retail buyers forces these companies to extreme highs, damaging the balance sheets of a range of hedge funds and traditional Wall Street firms. These companies, including GameStop (GME), AMC Entertainment (AMC) and Blackberry (BB), and others, were all amongst the most-shorted companies in the market as Wall Street traders expected their stock prices to fall further. However, a huge surge in retail buying, heavily discussed on the reddit WallStreetBets forum, has sent these companies’ share prices ‘to the moon’ causing the short sellers to cover at a huge cost. With the buyers still looking to buy stock to cover their short positions – real-time data on short positions are readily available - and with some options on these companies expiring on Friday, the expectations are for these companies to see another surge in volatility today and tomorrow. With GameStock currently seen over $100 higher than last night’s record close in pre-market trading, volatility looks set to jump. In cases like this, there is a real fear of missing out (FOMO) which also helps fuel speculative trades as traders are drawn to the volatility and potential of the next big mover. This can cause a breakdown in trader discipline and needs to be avoided.

How to Deal with FOMO to Become a Better Trader

While the VIX remains a distance below the peaks seen in March last year, it remains within striking distance of recent peaks seen in late-October, early-September, and mid-June last year. Yesterday’s move saw the gauge convincingly break through the 200-day simple moving average, breaking the trend of the last three months, and suggesting higher prices ahead.

VIX Daily Price Chart (March 2020 – January 28, 2021)

How to Short Sell a Stock When Trading Falling Markets

What is your view on the VIX – are you bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.