Matt Amberson of ORATS and Marko Kolanovic, J.P. Morgan’s global head of macro quantitative and derivatives strategy, were quoted in a Reuters article about the VIX bubble relative to S&P volatility although each have different views of the cause. 

Kolanovic is quoted in the article, “The gap between investor expectations and actual market moves is “indicating a bubble of fear and demand from investors looking to hedge or profit from a hypothetical market selloff.”

Matt’s take is that the VIX is elevated because of a more pronounced smile in the implied volatility surface of the S&P500 options, SPX. The right side of the SPX smile is elevated by unprecedented call buying in single names from retail spilling into the index. The left side is high because of an increased demand for put protection. Many think the stock market is in a bubble but with few other investment options, investors buy the market and buy protection.

The VIX is calculated using all options with a bid around 30 days to Friday expiration and can be very far out of the money. Currently, these wings are priced higher than normal and are driving the VIX higher. 

The elevated VIX is a result of the widening smile which is more about greed and FOMO than fear. The smile is systemic and may persist longer than what Kolanovic states. Also, when the smile gets to levels we see today, a correction has happened historically.

The relation of the SPX implied to historical volatility is in line with historical averages. It is the derivative/kurtosis that is 2.5 standard deviations above its normal levels. This is what is driving the elevated VIX in relation to the SPX implied and historical volatility.

The sea change in call buying in single stocks started in July and accelerated in November and has continued to the present. Stocks like GameStop, Tesla and AMC saw call buying at astronomical levels.  Below is a look at the 5 delta call IV divided by the 75 delta call IV in Russell component stocks:

The way out of the money call buying was combined with put buying and broadened the smile in the strike curve. Below is the ORATS derivative or kurtosis measurement in the SPY.

The kurtosis typically lasts until a correction in the market. Thus, we should probably see an elevated VIX relative to SPX volatility until there is a correction in the market. 

For more on how ORATS models the implied volatility surface see this post.