Stock Options Are Now Bracing for Brexit or Trump-Like Shock
(Bloomberg) -- Volatility markets are signaling that traders are steeling themselves for a news bomb to roil U.S. stocks.
Options “are pricing in heightened risk of a big move in the near term,” said Pravit Chintawongvanich, Wells Fargo’s equity derivatives strategist. He flagged that downside options that expire within the next week to 30 days have become pricey. Based on how little U.S. stocks have been gyrating and their proximity to all-time highs, he reckons the Cboe Volatility Index is two standard deviations higher than it would be under normal conditions.
Traders are bracing for “some kind of headline or event to hit markets and get things moving,” according to Chintawongvanich. He said volatility bets of this magnitude previously indicated there was an event looming, as happened before the Brexit vote and U.S. presidential elections, or a volatility spike had just occurred.
It’s the latest sign of persistent investor jitters in the face of an equity market that’s struggled to make much headway over the past 20 months, buffeted by a barrage of trade news as well as concerns about the durability of the economic expansion.
Similar divergences between implied volatility and the preceding price action came in May and August, when trade threats rattled markets. Impeachment fears or concern about an escalation of the U.S.-China clash over cross-border commerce could be fueling the current decoupling, the strategist reckons.
Chintawongvanich’s view echoes warnings across Wall Street that U.S. stock volatility was due to increase. Deutsche Bank and LPL Financial cautioned that the market calm would prove fleeting, while UBS Group found low implied volatility in American equities to be out-of-whack with other asset classes.
Relatively high skew makes it attractive to position for downside in utilities and industrials using put spreads, according to Chintawongvanich.
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