New York — On 2018-11-21, Reuters reported that U.S. equity markets were entering a more unsettled phase, with options traders increasingly betting that volatility would remain elevated rather than fade quickly.
The shift marks a sharp break from 2017, when stocks moved in a near-straight line and daily swings fell to multi-decade lows. By late 2018, the S&P 500 Index was on track for its most volatile year since 2015, according to Refinitiv data, after giving up all of its gains for the year.
Several forces were weighing on sentiment at once. Trade tensions between the United States and China, weakness in technology shares, concerns about slowing global growth and expectations of higher Federal Reserve interest rates all hit U.S. equities in recent weeks.
Investors were also focused on a planned meeting between U.S. President Donald Trump and Chinese President Xi Jinping at the next week’s G20 summit, with traders trying to gauge whether it would ease or worsen Sino-U.S. trade relations.
Richard Selvala, chief executive at Harvest Volatility Management LLC in New York, said the market was moving away from the unusually calm conditions of recent years. “We have had abnormally positive conditions for the last three, five, seven years,” he said. “We are transitioning to more normal conditions,” he said.
VIX stays above 20 as hedging demand rises ¶
For about six weeks, the Cboe Volatility Index, Wall Street’s “fear gauge,” had mostly remained above 20, a level traders associate with heightened expectations for near-term swings. Selvala said he expected the VIX to stay closer to 20 than 10.
Positioning in volatility futures backed that view. U.S. Commodity Futures Trading Commission data through Nov. 13 showed asset managers, institutional players, leveraged funds and other traders in the so-called buy-side holding a net long position of 11,441 contracts. That was a sharp reversal from early October, when they were net short nearly 90,000 contracts.
Options activity also showed a strong appetite for protection. Ilya Feygin, senior strategist at WallachBeth Capital, said demand for defensive contracts on the S&P 500 had been exceptionally heavy. “It’s been absolutely huge,” he said, adding, “Clearly there was a lot of hedging with puts.”
A put option gives the holder the right to sell an underlying index at a fixed level in the future, which can help limit losses if prices fall. Calls give the opposite right.
The rush was not limited to bearish protection. Traders were also buying calls, reflecting the possibility of a sharp move in either direction. Vinay Viswanathan, a derivatives strategist at Macro Risk Advisors in New York, said there was “risk for a large up move and a down move right now, more so than normally, because of tariffs, especially around the G20 summit.”
Trade Alert data showed open options interest on the S&P 500 Index and the SPDR S&P 500 ETF Trust climbing to the upper end of their respective two-year ranges. The same data showed a noticeable spike in implied volatility for S&P 500 options expiring on Dec. 7, the first weekly expiration after the summit.
For now, traders appear to be treating volatility itself as the safest position. As Viswanathan put it, “People are betting action could come in either direction.”
Reporting by Saqib Iqbal Ahmed; Editing by Nick Zieminski
