Complacency is seeping back into options markets as stocks surge toward record highs once more, following a brief April selloff. This resurgence is reflected in the pricing of hedges meant to protect investors’ portfolios from potential pullbacks or market crashes.
According to Rocky Fishman, founder of Asym 500, a provider of options market data and analytics, these contracts have significantly decreased in cost since early May.
Fishman noted that the recent rebound in stocks has caused the spread between the Cboe Volatility Index (VIX) and actual stock volatility to narrow significantly, reaching one of its lowest levels in years. The VIX, often referred to as Wall Street’s “fear gauge,” dropped to its lowest level since January, indicating a decrease in expected market volatility.
This decrease in volatility has made crash insurance, in the form of VIX calls, extremely inexpensive. For instance, VIX call options with a strike price of 25 expiring in approximately 40 days are currently trading at 30 cents per contract, significantly lower than their cost a year ago.
Additionally, protection against even a modest pullback has become cheaper, as indicated by the reversal of the S&P 500 index skew. This shift suggests that traders are once again favoring bullish calls over bearish puts.
The affordability of VIX calls and index puts presents an opportunity for investors looking to make bets, such as anticipating hotter-than-expected consumer price index reports.
However, any indication that the slowdown in inflation might be more than temporary could prompt another market reassessment regarding the timing of Federal Reserve interest rate cuts.
Despite a brief dip in April, both the S&P 500 and the Dow Jones Industrial Average have largely recovered, with the S&P 500 sealing its third consecutive weekly gain and the Dow Jones rising for an eighth straight session. However, the Nasdaq Composite experienced a minor decline amidst these movements.
