Coronavirus losses? Buyers of the VIX have made 10 times their money in the past month
It’s not a totally straightforward idea to invest in volatility – after all, what is it really? – is it actually anything tangible?
But markets being what they are, there’s a product anyway, and for UK investors it comes in the form of the Wisdom Tree S&P 500 VIX short-term futures index (LON:VILX).
No, it’s not ideal for UK investors to be looking to indexes across the pond to benchmark volatility, when there’s plenty of it to be had at home, but even so, the numbers speak for themselves.
On 17 February one unit of the Wisdom Tree VIX index was trading at just over 0.27p. Back then, even though there was awareness of coronavirus, the market was far more focused on the Democratic primaries, on tariffs, trade, and ongoing US-China tension.
But 17 February was crucial in one respect: it was the day that Apple released a profit-warning related to a slow-down of economic activity in China. Up until that point coronavirus had largely remained a problem to shove across other peoples’ desks. But with Apple’s warning, traders’ own screens began to light up.
Forbes ran an editorial with the title: Apple’s profit warning will be the first of many from US companies as the coronavirus has decimated China’s economy. And so it proved.
What was also interesting, was that it was then that the VIX started to move too. True, on 17 February the shift was still relatively small, but the rise from 0.27p to 0.29p was the start of something far more significant.
Why?
Because the S&P 500, against which this particular product is indexed was about to embark on a series of wild swings as the market took initial fright, then recovered its poise, then panicked, then enjoyed a series of dead cat bounces, and then latterly tanked again as President Trump announced his ban on travel into the US from Europe.
Ten days after the initial warning from Apple, the Wisdom Tree VIX unit was trading at 0.9p, a threefold rise and, after a brief dip in the first days of March, it then began to climb rapidly again.
That corresponds almost exactly with the rout that went on on the S&P 500. Amid headlines about record-breaking daily falls, the index dropped from 3,300 to under 3,000 in the ten days that followed the Apple profit warning, a decline of 9%.
It’s instructive to compare that to the 300% rise in the VIX across the same period. When the S&P paused for breath at the beginning of March, action on the VIX slowed, but the subsequent further decline to below 2,700 has been matched by a rise in the Wisdom Tree VIX unit to a high of 2.37p on 10 March, an almost tenfold rise on where it was three weeks ago, before the Apple profit warning.
On 11 March the VIX did give back a little bit of ground, the first time it had done so in nine days, but in mid-day trade on 12 March, the price was well over 3.4p, a 50% rise on the day.
In times of chaos and uncertainty, that’s a product worth taking note of.