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


© Reuters. FILE PHOTO Traders working on the New York Stock Exchange floor, New York City, U.S.A, 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 tumbled 2.5% on Monday, on pace for its largest decline since Jan. 27.

Analysts at Options Market said that there was no evidence investors are placing trades in order to protect their portfolios against further market declines.

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

“The 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.

Recent VIX readings have remained at around the 20 mark, which indicates that there are high stock market expectations for volatility. Stocks remain close to their 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.

Diverse measures of skew have been increasing for several months, which indicates a higher investor expectation of a steep pullback in stocks.

Murphy explained that “it’s likely to take a bit more than one to get everyone to start piling in to hedges.”

Analysts stated that many investors were focused on making profits on hedges they already own, rather than attempting to profit from stock falls.

Amy Wu Silverman (equity derivatives strategist, RBC Capital Markets) stated in a note that “the market was very well-hedged going into this move down.”

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

The upside call spread strategy allows investors to profit from stock price rebound and is relatively affordable.

The stock market’s recent sell-offs have been brief. Analysts stated that it is urgent to profit from existing hedges and monetize them before the market crashes.

Analysts at JP Morgan stated in a note that the market selloff that erupted overnight was primarily caused by technical selling flows, poor liquidity and overreaction by discretionary traders to perceived risk.

The analysts stated that they considered the selling a buying opportunity.

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