Traders Bet U.S. Stocks Are About to Make a Big Move, Somewhere
(Bloomberg) -- Breakout or breakdown?
As the S&P 500 Index moves closer to January’s record highs, traders are betting it could go in either direction -- in a big way.
Demand for two-month options that would pay off if the U.S. equity benchmark rises 5 percent or drops 9 percent over the next two months is elevated relative to those with strike prices much closer to the index’s current value.
The ratio between the implied volatility -- a proxy for cost -- of 10-delta versus 25-delta calls is nearly “back to the extremes we saw in January when the market rallied 5.6 percent in a month,” Mandy Xu, chief equity derivatives strategist at Credit Suisse, wrote in a note to clients Monday.
Investors weren’t eagerly seeking protection from a steep selloff at the start of the year, when the S&P 500 was hitting a series of fresh all-time highs. That’s changed.
“There is less complacency this time around,” Xu wrote. “The rich convexity priced into the S&P vol surface suggests investors see breakout potential for the index in the weeks ahead but are agnostic in terms of direction.”
Investors should consider buying call spreads that would benefit from a more muted rise in U.S. stocks over the next two months, according to the strategist.
©2018 Bloomberg L.P.