The stock market appears calm but fragile, with sudden spikes in volatility causing concern. On Oct. 16, the VIX surged to a six-month high despite a small S&P 500 drop, leading to worries about market fragility. The VIX quickly dropped back down after Trump’s tariff threats.

UBS strategists noted that the VIX jump was exacerbated by market makers shorting volatility as the market fell. Bank of America Corp. strategists attributed the spike to a technically driven move, with VIX exchange-traded products not contributing much. The pattern of calm interrupted by volatility spikes highlights the impact of leveraged ETFs.

The global market for leveraged ETFs is worth around $160 billion, with top 10 stocks accounting for 65% of it. On big moves, single-stock funds could impact price due to daily rebalancing around the close. Banks face around $300 billion in equities risk on leveraged funds, with potential gap risk from company bankruptcies.

Banks manage gap risk by selling a mix of derivatives to clients, unlike past crises with significant strike-less exposure. The current market regime, characterized by calm periods with quick reversals, poses a one-day vulnerability. Leveraged ETFs, especially in the tech sector, could pose contagion risk due to their substantial AUM.

Read more at Yahoo Finance: Market Fragility Tests Options Traders as Volatility Abates