In response to a turbulent week for the S&P 500 Index, investors are showing renewed interest in safeguarding their portfolios against potential downturns, highlighting a shift from the complacency that has characterized recent months.
During the first quarter, the demand for broad market insurance reached multi-year lows despite escalating geopolitical tensions and uncertainty surrounding interest rates. However, recent market movements have spurred a resurgence in the desire for protective measures among traders.
Joe Mazzola, the director of trading and education at Charles Schwab & Co., emphasized the growing recognition among investors that the market’s resilience in the face of rising interest rates and other challenges cannot continue indefinitely. “Something’s got to give at some point,” Mazzola stated.
The Cboe Volatility Index (VIX), a key measure of market sentiment often referred to as the VIX, reached its highest level since November on Thursday before retracing slightly as US stocks rebounded. Nevertheless, the VIX remains above its 200-day moving average, indicating sustained concerns about market volatility.
In recent weeks, investors have gradually increased their hedging activities, particularly through the acquisition of bearish three-month put options, which have seen their premiums rise relative to bullish contracts. Additionally, there has been a notable uptick in interest in tail-risk hedges designed to protect against significant market downturns.
Some investors have opted for spread strategies, which offer partial protection at a lower cost compared to outright contracts. Susquehanna International Group highlighted the popularity of put spreads targeting drawdowns in major equity indices such as the S&P 500, Nasdaq 100, and Russell 2000.
Stephen Solaka, from Belmont Capital Group, noted a growing demand for hedging strategies tied to both broad market indices and individual tech stocks, reflecting concerns about overvaluation following the recent market rally.
Market uncertainties, including geopolitical tensions, the upcoming US presidential election, earnings reports, and central bank policies, have contributed to investor unease. Federal Reserve Chair Jerome Powell’s remarks about the bank’s stance on borrowing rates, coupled with Neel Kashkari’s suggestion of no rate cuts in 2024, have further heightened concerns.
The spike in put volume associated with the iShares iBoxx High Yield Corporate Bond ETF indicates that investors are bracing for the possibility of disappointment from the Fed. These hedges could pay off if the central bank’s tightening measures lead to a decline in rate-sensitive assets.
Alex Kosoglyadov, managing director of equity derivatives at Nomura Securities International, underscored the impact of interest rates on market volatility, emphasizing that the Fed’s policy decisions could influence stock movements.
Options positioning reflects a preference for established megacaps over riskier stocks, with growth and quality ETFs attracting significant inflows compared to value funds. According to Rohan Reddy, director of research at Global X Management, the demand for protection stems from traders’ expectations of a soft landing, acknowledging the potential for unexpected market turbulence.
“While there is optimism for a smooth transition, there is also a recognition of the possibility of rough patches ahead,” Reddy remarked.
