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“This is probably a head fake and we still have kind of a higher duration of elevated VIX": RBC Capital Markets

Amy Wu Silverman, RBC Capital Markets Head of Derivatives Strategy joins the Yahoo Finance Live panel with the latest market action.

Video Transcript

ZACK GUZMAN: Volatility in the market has come down a bit, at least when we look at the measurement a lot of people point to, the fear index, so-called fear index on the VIX, trading now materially below 20, back to levels we haven't seen since pre-pandemic here. But our next guest is going to be walking us through what history says about moves to that sub-20 level, especially given all the volatility we've experienced here in the last year.

For more on that, let's bring on Amy Wu Silverman, RBC Capital Markets Head of Derivatives Strategy joins us right now. And Amy, I mean, when we walk through the numbers, I was reading through your note. Obviously, it's maybe something that a lot of people would point to and say, look, we're in the clear. But when you back up and look at history in other cycles, what do you see in terms of what this might be, maybe potentially a head fake, when it comes to the VIX?

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AMY WU SILVERMAN: Yeah, you know, that's the big question right now. Is the sub-20 kind of floating around 17 VIX level an all-clear sign? Or is it really just the head fake, and we're going to go back to elevated levels soon? I would say that's a really big debate right now among options people.

You know, I'm in the camp that this is probably a head fake, and we still have kind of a higher duration of elevated VIX. And a lot of that comes from what you see in the past, both in the global financial crisis, where it took four years for VIX to normalize, and then back to the internet bubble, where it took almost five years. Just kind of the Netflix earnings that happened last night kind of are a testament to some of the tail events that we still see.

As there is vaccine recovery, obviously these work-from-home names start to get hit. But at the same time, what I think is interesting is the recovery names are also getting hit for different reasons, As travel gets tightened while COVID is still an issue in other places. So I think these continue to bubble to the surface.

AKIKO FUJITA: How much of those jitters that we're seeing right now, Amy, do you think are justified, especially in some of those work-from-home names? You talk about a company like Netflix. Certainly, a big miss when you look at where the expectations were. But talking about revenue jumping more than 20%, certainly not a bad number.

AMY WU SILVERMAN: Yeah, absolutely. And you know, that's what it ultimately comes down, is the expectations. And I think that the biggest fear right now for why we in the options market believe that the pickup in hedging has started is it's all about where the expectations are. Back in November, it was really kind of a four, almost five standard deviation move in factors when the vaccine was first announced as being effective.

And since then, the market has known that we're going to get to the day where people are hopping on airplanes and going on cruises and booking vacations. And the problem is, from where we are now, has that all been baked in? And if you look at the options market, the kind of rise in hedging we're seeing shows you that probably they're very concerned that the expectations kind of are there already and we are priced for perfection.

ZACK GUZMAN: When you talk about the hedging action, I suppose Netflix's move, as you pointed out, would necessarily carry over to some other growth names that we've been watching, and why people might want to hedge those. When you look at IWM and kind of the tracking ETF there for the Russell, why hedging activity might be increasing there in some of the names that might be levered to reopening and enjoy that reopening more, what are you seeing on that side of the trade, and maybe what it says about expectations moving forward?

AMY WU SILVERMAN: You know, what's been interesting is since the beginning of the pandemic, it was always a trade off. So it was either NASDAQ was doing well because people were comfortable with these work-from-home names or there was this transferred to IWM, which has really become the proxy for smaller mid-cap type names, recovery names.

What we have seen recently, and I think is very telling, is you're actually seeing hedging pick up across the board. It's not sort of this transfer from one to the other. And S&P and IWM and NQS, you're seeing those hedging levels tick up overall. So the market has stopped really differentiating this versus that trade. And it's actually just saying, on a broad basis, we're fairly concerned.

And what that tells me is that we've kind of gone to the point in the market where most portfolio managers are really just overall worried about that market not necessarily going from one group to the other, and that's why you're seeing that hedging pickup in all three of those underliers.

AKIKO FUJITA: Amy Wu Silverman, RBC Capital Markets Head of Derivatives Strategy. I appreciate you stopping by today.