Yesterday’s market saw a significant increase in volatility, with the CBOE Volatility Index (VIX) surging over 10%. The move was driven by a combination of factors, including a sharp decline in the S&P 500 and a steepening of the skew curve.

Fixed strike options opened in the red and failed to catch a bid during the selloff, contributing to the volatility increase. As the market traded within a tight range in the afternoon, vols were slightly bid but most tenors still finished the day down. The term structure flattened, with the belly and back end of the curve down more than the front. This widening of the term structure is a common occurrence during periods of high volatility.

Interestingly, both the NASDAQ 100 (NDX) and Russell 2000 (RUT) vols outperformed the S&P 500, suggesting that investors are becoming more risk-averse and seeking shelter in these smaller-cap and tech-heavy indices. This is a reversal of the recent trend, where the S&P 500 had been the preferred safe haven during periods of market stress.

The steepening of the skew curve is a particularly notable development. The skew curve measures the expected volatility of options on the S&P 500 relative to their at-the-money options. A steepening of the skew curve indicates that investors are pricing in higher volatility for options further out in time, rather than just at-the-money options. This is a sign of increased market uncertainty and risk aversion.

Finally, vol of vol was also very bid, indicating that investors are eager to buy protection against potential future volatility spikes. This is another sign of the heightened market uncertainty and risk aversion.

Overall, yesterday’s market action suggests that investors are becoming increasingly cautious and risk-averse, with a flight to safety in smaller-cap and tech-heavy indices and a significant increase in volatility. The steepening of the skew curve is a particularly concerning development, as it indicates that investors are pricing in higher volatility for options further out in time. As always, it’s important to stay informed and adapt your investment strategies accordingly in response to changing market conditions.