Stocks Bounce but Fear Remains

The VIX, known as Wall Street’s ‘fear gauge,’ and the futures contracts that track it, tend to rise when stocks are falling because investors use derivatives contracts to bet on volatility or hedge against stock declines.


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Richard Drew/Associated Press

U.S. stocks rose Thursday after a deep dive Wednesday, but fear is still percolating in the derivatives markets.

Near-dated futures contracts tracking the Cboe Volatility Index, or VIX, continue to hover above those expiring later, a sign that investors are still girding for turbulence in stocks ahead in the near-term.

The VIX, known as Wall Street’s “fear gauge,” and the futures contracts that track it, tend to rise when stocks are falling because investors use derivatives contracts to bet on volatility or hedge their portfolios against stock declines. Futures bets expiring sooner generally trade below those expiring later because investors account for greater uncertainty later in time.

This dynamic in the futures curve can invert in times of market stress, and it stayed inverted in trading Thursday. Lately, investors have been rattled by trade tensions between the U.S. and China and another market signal—the yield curve—has also been flashing red. Analysts and investors say they don’t expect the market swings to recede anytime soon.

August futures edged lower on Thursday while those expiring in September and October rose in midday trading Thursday, FactSet data show. Contracts expiring in August, September and October continue to hover above those expiring November through December.

And in another sign that investors are bracing for big swings soon, they were betting Thursday that the VIX will jump to as high as 40 or 50, meaning it would roughly double or more, Trade Alert data show. Some of the most actively-traded bets were those that would pay out if the VIX jumped to 40 by September or 50 through October, they show.

But the gauge has a long way to go for those wagers to pay out. The VIX swung between small gains and losses and was recently up 1.5% to 22.43 in Thursday trading.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

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