Wall Street’s ‘fear gauge’ is doing something unusual. What it means

Something interesting is happening in the options market.

The S&P 500 touched record highs Thursday morning, but the Cboe Volatility Index (VIX) remained stuck near 20 and is up from five days ago, when the S&P traded about 100 points lower.

In other words, stocks went up and so did the market’s so-called fear gauge.

The VIX and S&P do move in tandem about 20% of the time, but if a “VIX-up/stocks-up” environment lingers for more than a few days it means a few things are likely happening under the surface of the market.

One explanation is simply that investors are doubtful of new highs in stocks and hedging against risks like the Iran war and crude oil. If that’s the case, traders should be wary of near-term pullbacks in the index as realized volatility “catches up” to VIX.

A more bullish interpretation – one that fits with what we see in options trading around earnings – is that traders are willing to buy expensive premiums in upside calls in single stocks that are making big moves higher, particularly in the semiconductors and tech names that are leading the rally.

Total call premium in the VanEck Semiconductor ETF (SMH) is 25% bigger than in puts despite put volume being greater.

Take one trade in chip stock Marvell Technology as an example. The stock has already doubled since earnings last month, but one trader shelled out $2.4 million to buy almost 1,700 contracts expiring June 18 at a strike of $180, looking for another 10% rally from here.

That enthusiasm is keeping options prices inflated, which could help explain why VIX is so sticky.