Volatility: whoomp, there it is

Volatility returned with a bang on Friday. Here's what it means, and what to watch next.

After months of calm, market volatility suddenly jumped on Friday. The Cboe Volatility Index, better known as the VIX, spiked above 21—the highest level since early August—after a sharp selloff in stocks triggered by new trade war fears.

The S&P 500 dropped more than 2%, its biggest one-day fall since April, following remarks from U.S. President Donald Trump about a possible "massive increase" in tariffs on Chinese goods. The reaction in volatility markets was fast and visible.

But while the move was big compared to recent weeks, it was not extreme by historical standards. That’s why Friday’s spike is better seen as a short-term shock, not the start of a broader panic—at least for now.

What is the VIX - and why do people watch it?

The VIX measures how much volatility the market expects in the S&P 500 over the next 30 days. In simple terms, it reflects how nervous investors are.

• A low VIX (below 15) usually means investors feel calm.
• A high VIX (above 20 or 25) means investors expect bigger moves—often linked to fear.

The VIX is often called the market’s "fear gauge," though that's a bit of an exaggeration. It’s more accurate to say it shows how much protection investors are paying for, especially through options.

What happened on Friday?

The VIX jumped to 21.66 from 16.43 in a single day—a surge of more than 30%. This sharp rise in implied volatility came alongside a notable increase in short-dated vol as well, with the VIX9D (which tracks nine-day expectations) spiking in tandem. The driver? A sudden flare-up in U.S.–China trade tensions, after President Trump threatened a massive increase in tariffs via social media. Equity markets reacted swiftly, with the S&P 500 dropping over 2%—its largest daily decline in more than three months, and the first move of that size in 100 trading days.

Does this mean investors are panicking?

Not really. According to most derivatives desks, the moves—though sharp—were orderly. Options market makers appeared well-positioned, without the kind of one-sided exposure that typically leads to frantic hedging. There was little evidence of panic buying or a rush for downside protection, which would have suggested deeper fear. And while the VIX did rise meaningfully, it remained far below historic extremes—nowhere near the highs of 89 seen during the 2008 crisis, or even the 85 level during the COVID crash. For comparison, earlier trade war flare-ups in recent years pushed the VIX into the 25–50 range. In that context, last week’s spike still looks relatively contained.

Why it still matters

Even if this wasn’t a panic, it was a meaningful shift. For months, investors and algorithmic strategies have been positioned for low volatility, profiting from stable markets through tactics like structured notes and other volatility-linked products. When volatility jumps, these positions can come under pressure. If those strategies start to unwind, they can add fuel to broader market declines. So even a contained vol spike like this can ripple outward by changing risk appetite and market positioning.

What to watch next

There are a few key indicators that will help determine whether this volatility episode fades or persists. First, watch whether the VIX remains above 20—sustained levels above that threshold typically reflect a more cautious market tone, while a quick retreat could suggest the spike was just a temporary shock. Second, monitor the shape of the VIX futures curve. In normal conditions, longer-term contracts trade above shorter ones. When that structure flips, it's often a warning sign. On Friday, the curve merely flattened, which suggests limited stress for now.

Another important signal is the VVIX, or the volatility-of-volatility index. It rose to about 116 on Friday—an elevated reading, but still well below danger zones. If it drifts lower this week, that’s a sign the market is calming. Finally, geopolitical headlines will continue to drive sentiment. Any further escalation—or resolution—of U.S.–China trade tensions could shift the outlook quickly.

Taken together, these indicators offer a real-time read on whether markets are normalizing—or whether renewed caution may be warranted.

Update – Monday 13 October

Early Monday futures data suggests the worst of the volatility pop may be easing. As shown in the chart below, VIX futures (VXV5) have pulled back from their Friday highs, with front-end contracts slipping back toward the 19–20 range. This drop, alongside a rebound in equity futures (ES Mini), points to some unwinding of hedges and a calmer tone—for now.

That said, it's too early to call a full reset. The macro catalyst—U.S.-China trade tensions—remains unresolved, and such sharp reversals can often turn into dead-cat bounces. But the initial signs are encouraging: contango may return, VVIX is off its highs, and Friday’s vol spike looks increasingly like a short-term repricing rather than the start of a new vol regime.