‘Stealth hedging’ shows investors not complacent


“It is sort of under the surface, more like stealth hedging,” he said.

“We did not see it on our desk and nobody appears to care much about hedging but somehow it’s happening,” said Jim Strugger, derivatives strategist MKM Partners in New York.
Earlier this month, VIX known as the VIX and the barometer of anticipated stock exchange volatility, closed at a record low.
They added that the shift in the pricing of risk, despite the low level of the VIX, showed that investors may not be complacent after all. (nyfed.org/2zLCYEL)

A recent blog post by New York Federal Reserve researchers showed that as the overall level of volatility has dropped, investors are pricing in far more volatility in longer dated options than in contracts.
Some investors warn that increased reliance on strategies that benefit from weeks of frustration over hedges that have gone to waste while the market powered on, and calm in stocks, have left the market vulnerable to a shock.

VIX options also reveal raised positioning in VIX calls that are out-of-the-money – if volatility spikes contracts that are not profitable yet would reap benefits.

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The S&P 500 index . SPX has climbed 16 percent this year and is on pace for its eighth straight month of gains, the longest such streak since just prior to the 2007-2009 monetary crisis.

NEW YORK (Reuters) – With the U.S. stock market at a record high and daily stock gyrations near multi-decade lows, some investors have raised concerns about the absence of fear in the current market, but U.S. equity options market data suggests investors are far from complacent.

A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S. December 28, 2016.
Positioning in choices on S&P 500 index . SPX and CBOE Volatility Index . VIX shows investors and hedges over the last few months have been adding together.

An index call option gives the holder the right to buy an underlying index’s worth at a level in the future. A put conveys the right and is utilized to protect against declines in the index.”When open interest on VIX out-of-the-money calls is really high, I would tend to believe that the market is more aggressively hedged,” said Aashish Vyas, director of portfolio strategy at Durango, Colorado-based Swan Global Investments.
Positioning in choices on SPDR S&P 500 (SPY.P), iShares Russell 2000 (IWM), the PowerShares QQQ Trust (QQQ.P) also reveal healthy defensive positioning.
“People have downside protection,” he said.

For instance, for the S&P 500 index options, there are 2.1 puts available for each open call contract, near the most defensive this measure has been over the last five decades, according to choices analytics company Trade Alert data.

Complacency should top the stress list for investors, according to participants in the Reuters Global Investment 2018 Outlook Summit in New York.
“I don’t believe the industry is complacent,” said Joe Tigay, chief trading officer at Equity Armor Investments in Chicago.
Reporting from Saqib Iqbal Ahmed; Editing by Tom Brown

Released at Sat, 25 Nov 2017 03:57:45 +0000
Lively put volume indicates interest in positions, while some of put activity may be due to investors selling puts to generate income, analysts said.

That is a departure from the period when investors demanded similar returns for taking one-month and one-year volatility risk onbetting that the state of calm would last in the future, the researchers said.

“More often than not, even in the world we live in where volatility is indeed appealing to sell, you may make a reasonable assumption that people are purchasing options,” said MKM’s Strugger.
(Graphic: S&P 500 Index & VIX Options Open Interest – reut.rs/2AowYEU)
The options market, however, suggests as the anemic level of the VIX would suggest that investors are much less vulnerable to some sell-off in stocks, analysts said.

While the data does not suggest that the market is gearing up for an immediate crash, as would be suggested if the VIX were to shoot up, it does imply that investors wouldn’t be taken by surprise if volatility begins to trend up in coming months.