• US stocks slump after Fed rate decision, policy path forecast

• Volatility and bearish skew increase across benchmarks

(Bloomberg) -- As the smoke clears after the worst S&P 500 reaction to a Federal Reserve meeting in years, charts of equity options markets show a sudden shift in sentiment and positioning as the equity benchmark fell almost 3%.

Stocks sold off sharply late in the session after Fed Chair Jerome Powell indicated that the central bank will likely put further reductions on hold while inflation stays above its 2% target. 

The Cboe Volatility Index — which measures expected volatility in the S&P 500 — closed the day at extremes not seen since the volatility shock of early August. The VVIX, which gauges the volatility of VIX options, ended the day at the highest since early September.

VVIX, VIX most extended since August vol shockSource: Bloomberg

The large moves in both indexes shook up the calm seen across the market, where the VIX was headed for the lowest annual average in five years. The VVIX jump shows the demand for VIX options as broad protection against bigger swings. 

Strategists have been expecting more volatility shocks in 2025 after the Trump administration takes over, with potential tariffs and geopolitical tensions offering more chances for upsets.

Measures of skew jumped as well on Wednesday, as traders paid up for demand for protection against further drops in the major stock indexes.

There had already been a pattern of increased VIX call buying in early December, with traders looking for protection. That accelerated Wednesday, with the call skew steepening.