Saqib Iqbal Ahmad

NEW YORK (Reuters] – Options market traders were reluctant to wager on an end in stock market selling. Wall Street’s most closely followed indicator of equity market fear soared on Monday to its highest levels in nearly a decade.

Cboe Volatility, the Wall Street fear gauge, was up 9.14 to 37.99. This is its highest level since November 2020. Its recent peak came as a result of fears over an increasingly hawkish Federal Reserve. Also, a Russian attack against Ukraine could cause the Cboe Volatility to drop more than 10%.

Traders were not expecting the stock market to fall soon, despite the fact that stocks fell.

“I am not seeing much along the line of ‘quick end to the sell-off’,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.

Murphy stated that “it still looks pretty scary.”

Overall trading in put options was 1.1 times more common than trading in bullish options on Monday. This is because it’s used for placing defensive or bearish bets about stock and index prices. This is the lowest ratio of put options to bullish call options since March 2020 according Trade Alert data.

Randy Frederick (Vice President of Trading and Derivatives at the Schwab Center for Financial Research) stated that “This is certainly more severe than anything else we’ve seen in nearly two years”.

The strategy of “buying the dip” is a very well-recognized one in recent years. Traders in options and stocks have made huge profits by betting on an immediate rebound whenever stocks fall.

There were some odd bets made on Monday upside but, overall, it seemed that traders avoided dip-buying. Susquehanna’s Murphy stated.

Frederick of Schwab said last week that the price action in which stocks rise early on certain days, only to lose those gains later in session may have prevented investors from making upside bets.

Frederick stated, “If I was a bargain hunter I might be gun shy based upon that.”

Futures curve is a visual representation of the prices for futures contracts on volatility index over different expirations. It shows that traders pay more for short-term insurance than contracts that are many months away.

VIX futures that expire in February trade at 4 points premium to those expiring September. This is the highest since November 2020.

This and other signals of extreme fear are contrarian indicators. They often indicate bottoms for a sell-off in the stock market. But Monday was characterized by few positive signs.

Murphy explained that “despite all these contra indicators the market keeps selling off.”