US indices are catching their breath after a sharp decline in implied volatility

Implied volatility is a measure derived from the options market, which is the only financial instrument that measures the potential future scale of changes in the underlying asset. These may be individual shares, raw materials, currencies or entire stock indices, such as: S & P 500.

The measure of future expected volatility, in the case of SPX, is the so-called fear index VIX, which is calculated based on 30-day options on the SPX index. Its value, e.g. 18, means that the options market estimates the change in the entire SPX index at 18 percent per year if the implied volatility from the coming month were to persist throughout the year (this is an annualized value).

As we know VIX index jumped significantly up from less than 13 points. a month ago to over 21 points. on Friday, April 19, when there were fears of an escalation of the conflict in the Middle East. However, already on Friday we learned that there would probably be no escalation, which led to a change in sentiment regarding fear and uncertainty and a very quick return of the VIX index to the level of almost 15 points.

Volatility drops sharply and increases in the US

The overestimation of the expected volatility could have been the main catalyst for the rebound on Wall Street, or in fact the squeezing of positions that were responsible for securing against possible further declines in this index. SPX is to have a key support level in the area of ​​4900 points, below which there will be levels activating sell orders for shares worth tens of billions of dollars. For now, however, the index has returned to 5050 points. and if it went above 5100 points, the risk of a much larger correction could be averted initially.

5100 points crucial for SPX

If the market manages to break above 5100 points. this will increase the chance for volatility to remain at lower levels, which may smooth out the fluctuations of the entire index, which could return to growth under favorable macro conditions. Favorable macro conditions include: an increase in the liquidity of the US banking sector as the TGA account balance decreases after receiving tax payments, no further progress in increasing US bond yields, a weakening US dollar and, of course, positive market reactions to company results that are already around the corner and no escalation of any conflicts, as the market may be completely unprepared for the next wave of increase in expected volatility.