Wall Street Traders Driving S&P 500 Records Loaded Up on Hedges
(Bloomberg) -- Stocks may have just wrapped up August with 12 record closes, but Wall Street investors aren’t losing all self-control just yet.
With U.S. equities rising for seven months running, the market underbelly shows institutional managers are bidding up protective options, while signs of restraint are emerging in the speculative world of retail investing.
According to UBS Group AG, the Robinhood-powered crowd now accounts for the smallest slice of derivatives volumes since April 2020, and demand is cooling for short-dated bullish calls in retail traders’ favorite Big Tech names.
“The market is considerably less complacent or technically overextended than one might assume,” wrote Michael Purves, CEO of Tallbacken Capital Advisors, in a client note.
Take the Cboe Volatility Index, which closed near the pandemic-era average at 16.48 on Tuesday. That, according to Tallbacken, puts the VIX within the highest 15% of all readings relative to realized volatility, or how much stocks are actually moving, over the past 15 years.
Then there’s the elevated options skew, which shows outsize demand for protective put contracts relative to bullish calls. Another sign of stock sentiment -- rising open interest in puts -- also suggests Wall Street hedgers are out in full force.
Meanwhile, a key source of bullish mania over the past year has quieted down for now. Small-options trades -- those of 1 to 10 contracts that bear the footprint of retail investors -- make up just 18.3% of total volumes, according to UBS. That’s the lowest since April 2020.
Alphabet Inc., Amazon.com Inc. and Facebook Inc. are showing volatility metrics that are “consistent with less demand for short-dated calls,” Stuart Kaiser and Artour Danilov at UBS wrote in a note. That’s a sign the frenetic tech rally of late has seen less demand than usual from the retail cohort.
All the same, day traders paring optimistic bets may be a warning sign for a bull market absorbing every blow.
“The vulnerability of the U.S. equity market is that retail investors there are heavily overweight stocks -- even more so than they were during the dot-com bubble,” said Nikolaos Panigirtzoglou, a strategist at JPMorgan Chase & Co., in an interview.
Still, thanks to the hedging frenzy in stock options, at least the U.S. market is better positioned to absorb any waves of selling ahead.
“If the market is in fact better hedged going into September (a notoriously volatile month) then that should ultimately mean less market drama than might otherwise be the case,” wrote Purves.
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