S&P 500 Volatility Set to Spike as Nvidia Earnings Loom

The S&P 500 finished higher but not by much on Tuesday, with a tight trading range and a one-day VIX finishing below 9. However, this low level of volatility is unlikely to persist, as Nvidia's earnings report tonight is likely to cause a significant increase in the VIX.

Since 2022, it has been rare for the one-day VIX to close at such low levels. As a result, implied volatility is expected to expand from here, particularly in the semiconductor sector, which has seen its VXSMH drop to 38.9, its lowest level since August 14 and January.

Notably, semiconductor implied volatility is falling faster than overall market implied volatility, despite Nvidia's earnings report tonight. This means that semi-options are becoming less expensive relative to index options, causing the market to price the semiconductor sector more in line with the S&P 500 rather than on its own story.

This shift could have significant implications for investors, as it means that if semis drop after Nvidia reports, they are more likely to take the S&P 500 down with them. Additionally, VXTLT is trading below 21-day realized volatility in, and well below 9-day realized volatility, which seems odd given the event risk for the bond market on Friday.