Cboe flags rising hedging demand ahead of Fed decision as oil and inflation lift market volatility

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Highlights

Cboe Global Markets reports risk asset sell-off as escalating Middle East tensions push oil prices higher and U.S. core inflation intensifies rate hike concerns, raising OIS market rate hike odds for this week's FOMC meeting from 58% to 90%.
OVX Index jumps 14 points to 59% and VIX Index adds 1.3 points to 15.8%, with SPX one-month put skew reaching the 73rd percentile, indicating robust demand for portfolio hedging.
Spread between VIXEQS and VIX halves from July's record, QQQ-SPX one-month implied volatility spread hits one-year low at 3.6%, and three of the four largest VIX trades in 2024—each over 120,000 contracts and $12 million in premium—were executed in the last two weeks.

Volatility gauges rise before FOMC

As reported by Cboe Global Markets, risk assets sell off last week as escalating Middle East tensions push oil prices higher and firmer U.S. core inflation strengthens concerns about persistent price pressures. In the OIS market, the odds of a Federal Reserve rate hike at this week's FOMC meeting rise from 58% to 90%, while the OVX Index jumps 14 points week on week to 59%.

The VIX Index gains 1.3 points over the week to 15.8%, with more than half of that increase linked to a steeper SPX skew and convexity profile. SPX one-month put skew, measured by the 25-delta to 50-delta ratio, climbs to the 73rd percentile, indicating stronger demand for portfolio hedging.

Shift from stock-specific to macro risk

Single-stock volatility moves in the opposite direction, with the VIXEQS Index falling 1.3 points to 34.5%. Cboe says the spread between VIXEQ and VIX has now halved from its record 34% high in July, suggesting equity-market risk is shifting from company-specific drivers such as earnings and AI to broader macro factors including inflation and rates.

Concerns around the AI trade also ease, reducing the volatility premium in technology shares. The QQQ-SPX one-month implied volatility spread now trades near a one-year low of 3.6%, while tail-risk hedging in equities increases through VIX options. Three of the four largest VIX trades of the year occur in the past two weeks, each involving purchases of more than 120,000 outright VIX call contracts, with about $12 million in premium per trade and strikes ranging from 28 to 34 for October and November expiries.

Our earlier article on the upcoming Federal Reserve rate decision outlined how markets were pricing a very high probability of a quarter-point hike and bracing for heightened volatility around the announcement. It also highlighted the importance of Fed communication and guidance on the inflation outlook, noting that unclear messaging can quickly shift confidence and tighten broader financial conditions.

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