Hedging Gets Frantic as Puts Soar Amid Stock Market Hammering

After this week’s selloff that erased more than $1 trillion in value from the S&P 500, investors are rushing to add to their bearish bets.

A Cboe put-to-call ratio that tracks the volume of options tied to everything from single stocks to indexes, including the S&P 500 and the VIX fear gauge, reached 0.99 this week in its highest level since November. Short bets against the largest S&P 500 ETF, ticker SPY, have also spiked, as have those on the tech-focused Invesco QQQ fund.

Hedging Gets Frantic as Puts Soar Amid Stock Market Hammering

The bearish bets come as the S&P 500 fell for a third day on Wednesday amid concerns inflation could stifle a recovery in the U.S. economy. Many investors worry price pressures could be persistent enough to force the Federal Reserve to tighten its policy sooner than it’s previously telegraphed. The benchmark index has lost roughly 3.5% since Friday. Richly-valued technology shares have also declined -- the Nasdaq 100 is more than 6% off its April peak.

“I would be hesitant to be a buyer here,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab. “This hasn’t played out yet and it may go down further. The momentum was already to the downside.”

Still, the spike in the put-call ratio could be seen as a contrarian signal. It was likely affected by fewer call purchases from retail traders who have become less active, in addition to more put trading, said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.

The S&P 500 has posted a median two-week return of around 3% following the 10 highest put-call readings over the past 12 years, Murphy said.

“History has shown more often than not a peak in put-call ratios comes before a market rebound,” he said. “We certainly could keep selling off, but this is a data point for the rebound camp.”

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