Finimize - 📉 Investors are betting on a dip

What’s going on here?

Investors are on course to trade a record volume of options tied to the VIX volatility index this year.

What does this mean?

Volatility measures how much and how quickly the prices of assets move up and down. And the influential VIX volatility index – known as Wall Street’s “fear gauge” – shows the expected volatility in the US stock market over the next month. A low reading indicates that the markets are calm, while a high one hints at panic among investors. But the VIX isn’t just informative: investors can trade the index, letting them potentially cash in from their hunches about future volatility. So far this year, investors have traded an average of 742,000 options tied to the VIX every day. That’s more than 40% higher than in 2022, and beats the full-year record of 723,000 set in 2017.

Why should I care?

For markets: Investors’ cups are half empty.

“Call options” on the VIX – trades that pay off if volatility increases – have been especially popular this year. And because spikes in volatility often align with intense market selloffs, the interest in call options signals that investors are growing increasingly skeptical of this year’s stock market rally. The S&P 500 is up over 10% this year, after all, but investors’ moods are starting to sour at the prospect of economy-busting interest rates staying higher for longer.

Zooming in: Slow and steady doesn’t always win the race.

The VIX has been sitting unusually low for most of the year, leaving a lot of room for a hefty pickup that would benefit investors with call options on the index. But while the VIX does tend to rise when stocks fall and vice versa, that relationship isn’t guaranteed. The index is more likely to spike if stocks sharply sell off than if they post a slower slump, so buying call options isn’t a totally surefire way to hedge against falling markets.

What’s going on here?

High interest rates have been anything but groovy for renewable energy companies.

What does this mean?

The S&P Global Clean Energy Index measures how the thirty biggest renewable energy companies are doing, and right now, they could be holding up a whole lot better. Down just over 20% from only two months ago, the index looks like it’s headed for its worst year in the last decade. That’s probably because major green energy firms lock in prices way ahead of time with long-term contracts, which isn’t ideal at a time when rising interest rates are pulling up their costs and making their borrowed cash more expensive to pay off.

Why should I care?

For markets: Money can’t buy happiness.

Even flush with loads of cash in the form of tax credits, subsidies, and loans from the US and European governments, green energy companies are still slipping. What’s more, that external assistance means plenty of firms that couldn’t have survived off their own back are still alive and kicking. So this mass underperformance could end up being a game-changer: suffering companies will need to rethink their strategies – renegotiating contracts and cutting out unprofitable ventures – to stay above water. So in theory, the future will be full of energy businesses built to last.

The bigger picture: Misery loves company.

Regular stocks are feeling the heat of high interest rates too. See, those rates minimize the reward that investors get from holding onto riskier stocks rather than more stable assets like bonds or cash. And at the same time, rising rates have pulled returns on bonds and cash up to their highest point in more than 20 years. For investors, ditching stocks and filling up savings accounts has been a no-brainer.