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As stocks fall, options traders show no rush to guard against deeper pullback

EconomySep 20, 2021 03:00PM ET
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© Reuters. FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 12, 2021. REUTERS/Brendan McDermid/File Photo

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - U.S. stocks are experiencing the biggest wave of volatility in months but options traders are showing little appetite for more protection, a sign that at least some of them believe the current selloff will be short-lived.

The Cboe Volatility Index, known as Wall Street’s “fear gauge,” stood at 27.5 on Monday, its highest level in more than four months, as concerns about heavily indebted Chinese property company Evergrande added to jitters over global growth. The S&P 500 tumbled 2.5% on Monday, on pace for its largest decline since Jan. 27.

Options market analysts said there were few indications that investors were putting on trades to shield their portfolios from further market drops, at least for now, however.

"The selloff appears to me orderly, somewhat expected and not panicky," said Susquehanna International Group’s Chris Murphy.

"The VIX and the term structure and skew... Those were all pricing-in a degree of panic," said Murphy, referring to various gauges of investor expectations for volatility.

The VIX has lingered around the 20 level in recent days, pointing to elevated expectations for near-term stock market gyrations, even as stocks remained close to record highs. September has historically been a tough month for stocks, and the S&P has gone more than 300 calendar days without a selloff of 5% or more.

Various measures of skew, a gauge of demand for puts versus calls, have also been elevated for months now, pointing to heightened investor expectation for a sharp pullback in stocks.

"It's going to probably take a little bit more than one day for everyone to start piling into hedges," Murphy said.

Instead, many investors appeared to be focused on reaping gains on existing hedges that would have profited from a fall in stocks, analysts said.

"Remember that the market was extremely well-hedged coming into this move down," Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets, said in a note.

"We are seeing hedges monetized and investors actually purchase upside via call spreads in S&P," she said.

Buying upside call spreads is a relatively inexpensive options strategy that allows investors to benefit from a rebound in stock prices.

Stock market sell-offs over the last few years have been fleeting. That raises the urgency of monetizing - or taking profits from - existing hedges before a rapid rebound in prices can erase the gains, analysts said.

"The market sell-off that escalated overnight we believe is primarily driven by technical selling flows in an environment of poor liquidity, and overreaction of discretionary traders to perceived risks," analysts at JP Morgan said in a note.

They said they viewed the selling as a buying opportunity.

As stocks fall, options traders show no rush to guard against deeper pullback

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Bubba Born
Bubba Born Sep 20, 2021 8:57PM ET
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3 words.."Bull Call Spreads"
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