In-Depth Analysis: Aug. 5 Market Drop and VIX Surge
In-Depth Analysis: Aug. 5 Market Drop and VIX Surge
By:Kai Zeng
The “fear index” soared to 38—its highest level in years—as anxiety roiled the markets
On Aug. 5, 2024, the financial world saw significant fluctuations, with Japan's Nikkei index dropping by a massive 12.4%. Meanwhile, in the U.S., the S&P 500 index (SPX) fell by 3%, and the Cboe Volatility Index, or VIX—often referred to as the "fear index"—soared to 38. The VIX hadn’t reached that level in years. It was truly a case of heightened anxiety in the markets.
The 3% drop in the S&P 500 didn't just happen—it marked the 25th largest single-day decline in the past five years and the 33rd largest in the past decade. Essentially, this places the day's events in the extreme 2% of all daily declines over the last ten years.
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To put this into perspective, 2020 was the most volatile year in the past decade, followed by 2022. The only times the S&P 500 experienced more than a 5% drop in one day were in March 2020, highlighting the rarity of such significant declines.
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The S&P 500 usually experiences large movements less frequently than the Nasdaq index, which is known for its higher volatility. For example, the Nasdaq often reports daily drops of 3% or more, making it the more unpredictable sibling.
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The VIX, which measures market volatility, jumped impressively from 23 to 38 in a single day. This sharp rise places it in the top 1% of all moves over the past decade. Specifically, it was the fourth-largest increase in points and the second-largest in percentage terms. Elevated VIX levels generally mean that investors are more apprehensive, and asset prices are likely to be more unpredictable.
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When the VIX is above 30%, the correlation—or the degree to which different asset prices move together—tends to rise. Right now, we're seeing this increased correlation, meaning that diversifying investments becomes more challenging.
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Options traders—those who buy and sell options contracts—pay close attention to how quickly premiums can increase when volatility rises. To explore this, we looked at the premium changes in four key stocks and exchange-traded funds (ETFs): S&P 500 ETF (SPY), Nasdaq ETF (QQQ), Advanced Micro Devices (AMD) and Energy Fund ETF (XLE).
We examined the premiums for selling a 45-day, 1SD strangle on Monday and compared it to a scenario where the underlying stock prices were at the same levels but with half the volatility. Our findings showed the premium for this strategy jumped at least 50% higher across different investments. Interestingly, index options like SPY and QQQ reacted more strongly than individual stocks like Advanced Micro Devices (AMD) and sector-specific funds like XLE.
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Takeaways:
- The S&P 500’s 3% decline is rare and significant, placing it in the extreme 2% of all declines over the past decade.
- The VIX’s jump to 38 represents one of the largest surges in recent history, reflecting heightened market anxiety.
- Premiums for options, especially those for indices, increased substantially, presenting opportunities for traders to secure richer returns.
Kai Zeng, director of the research team and head of Chinese content at tastylive, has 20 years of experience in markets and derivatives trading. He cohosts several live shows, including From Theory to Practice and Building Blocks. @kai_zeng1
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