There’s a record disconnect unfolding in the trading pits right now

Forget the tale of two cities; For investors in the U.S. stock market, these are two different worlds.

If you follow index increases S&P 500This has been a slow and steady trend, with volatility falling to its lowest level since January. Cboe Volatility Index (VIX) It touched 15.6 on Thursday, compared to 35 in March when geopolitical fears led to sharp daily moves in the market.

If you’re trading individual stocks, the roller-coaster ride hasn’t stopped yet, and in many cases, especially in tech names, it’s gotten even crazier.

Cboe’s S&P 500 Founder Volatility Index VIXEQ, which combines VIX-like metrics for each company and weights by market capitalization, is approaching its highest level in more than a year. The gap between VIXEQ and VIX is the widest since January 2023, according to the exchange’s stock-specific data.

“What stands out about the current market is how calm things are at the index level, even as single-stock volatility remains near a 1-year high,” Cboe head of derivatives market intelligence Mandy Xu wrote in an email. “Stock dispersion is extremely high and correlation levels have fallen to historic lows as traders shift focus from macro risks (e.g. Iran) to stock-specific catalysts such as AI and earnings.”

The volatility spread between individual stocks and the index makes a big difference for options traders, who make risk-reward decisions based on the rapidly changing prices of individual contracts.

The clearest example is in the semiconductor space; variability here VanEck Semiconductor ETF (SMH) nearly 50%, near a one-year high and more than three times higher than the S&P 500, but still lower than many individual stocks MicronIts implied volatility is 101%.

As a result, the amount of dollars spent on options trading on semiconductors is soaring: Gross option premium traded among semiconductors tracked by Citadel Securities is 25% above the previous record in March 2024 and five times the historical monthly average, according to a message from Scott Rubner, the firm’s head of equity and equity derivatives strategy.

So far there isn’t much evidence that investors think the split volatility dynamic will change.

Small traders have been happy to buy expensive single-stock contracts in the hope of extending rallies, which has mostly worked so far. And in index products as below State Street SPDR S&P 500 ETF (SPY)The most popular trade on Thursday was a put: a bet that generally favors the VIX continuing to fall. Somewhere in between is sentiment towards the SMH ETF, which is dominated by puts at record levels.

“My sense is that when you have that kind of historical discontinuity, you’re more likely to have some expansion,” Noel Smith, chief investment officer at Convex Asset Management, said by phone. “I don’t see things falling apart until these big IPOs (SpaceX, Anthropic, etc.) are swallowed by the market.”