A Conundrum for Hedgers: Now That You Need It, the VIX Is at 32

(Bloomberg) -- The days of market calm are dead. After weeks of basking in equity tranquillity and shunning protection, traders are scrambling to hedge at all costs.

The VIX has more than tripled since the peak in global equities just two weeks ago, surging far more than volatility gauges of other asset classes. That was a rude awakening for investors who got used to seeing it hover around record-low levels. As shares lost almost $6 trillion of , investors are battening down the hatches.

“The bulk of the stress has been equity-centric, and by far the largest shock has been to U.S. equity vol,” Bank of America Merrill Lynch equity-linked analysts including Benjamin Bowler wrote in a note this week.

Hedging against further losses in the S&P 500 Index has become more expensive than ever before -- just after reaching particularly cheap levels only a month ago. Prices for bearish three-month options relative to bullish ones have surged from a four-year low as trading of puts and calls jumped. A Bank of America Merrill Lynch gauge tracking demand for volatility protection among major global equities and currencies is at its highest level since Brexit.

Trading of Cboe Volatility Index derivatives surged to levels never seen before. A record 4.3 million options changed hands on Feb. 2, with volume remaining above about 2.5 million contracts each day this week. That led to an upsurge in VIX options costs, with a gauge tracking the index’s implied volatility hitting an all-time high on Thursday.

VIX futures trading peaked on Tuesday, with 1.3 million contracts changing hands. As investors focused on short-term hedging, derivatives expiring over the next month have risen to their highest levels since October 2008 relative to three-month contracts.

One thing’s for sure: the popularity of exchange-traded products tracking VIX futures is waning. The demise of a favorite note that almost tripled in last year and the halt of other similar securities have sent some investors scrambling for the exit. ETPs that are long equity volatility -- which had record gains this week -- are losing money. 

©2018 Bloomberg L.P.