Read for 4 minutes (Reuters) – NEW YORK (Reuters) – Despite the fact that U.S. equities are soaring to new highs every day and Wall Street’s “fear barometer” indicating a low level of concern, some sections of the options market suggest investors are becoming considerably more scared of a sharp pullback than they have been in months. Showcase ( 3 images ) The Cboe Volatility Index, sometimes known as Wall Street’s fear barometer, is back to post-pandemic lows, indicating that investors aren’t worried about stock market weakness in the near future. Other, less visible indicators, on the other hand, are flashing red, signaling that the market may be headed for a significant plunge. It is more expensive to hedge one’s portfolio against a dramatic drop in the S&P 500 than it is to buy options that would profit from a large gain. A put option that hedges against a 10% collapse in the S&P 500 by August costs nearly 35 times as much as a call option that profits from a 10% climb. According to Amy Wu Silverman, equities derivatives strategist at RBC Capital Markets, at the height of the stock market panic in March 2020, that downside put option only traded for 11 times the upside calls. Over the previous five years, the Nations TailDex, which gauges the cost of hedging against a 3-standard deviation rise in the SPDR S&P 500 ETF Trust, has been higher nearly 90% of the time. That kind of disparity between the VIX and other indicators is “not terribly frequent,” according to Randy Frederick, Charles Schwab’s vice president of trading and derivatives. One argument is that institutional investors, who are more likely to hedge against a large market fall, are rushing to protect their downside, while regular investors continue to bet on the market grinding higher, according to Frederick. The market’s contradictory signals on volatility, according to Joe Tigay, portfolio manager at Equity Armor Investments, indicate that investors may flee the scene at the first hint of danger. “The market, in my opinion, is not as hedged as it should be,” Tigay added. According to Arnim Holzer, macro and correlation defense strategist at EAB Investment Group, some investors are concerned about the economic impact of the Delta coronavirus variant’s spread, as well as how the Federal Reserve will react to inflation and economic growth data, making it prudent to protect against a 5% to 10% drop in stocks. The abnormally extended period of tranquil trade has also made many investors apprehensive. According to Sam Stovall, chief investment strategist at CFRA, the S&P 500 index has experienced a loss of at least 5% every 178 calendar days since WWII. The recent market rally has lasted 292 days without a correction, the longest streak since January 2018, when the S&P 500 experienced a 715-day rally followed by a 10.8% slump. Seasonality plays a role as well. According to Jeffrey Hirsch, author of the Stock Trader’s Almanac, the period from mid-July to October has generally been the lowest time of the year for equities. In a recent note to investors, Chris Murphy, Co-Head of Derivatives Strategy at Susquehanna Investment Group, noted, “US equities have been extraordinarily robust.” “However, with a seasonably bad period looming and earnings expectations sky high, macro hedges are worth considering.” Saqib Iqbal Ahmed contributed reporting, and David Gregorio edited the piece./n
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