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By Saqib Iqbal Ahmed
NEW YORK (Reuters) – U.S. stocks have seen the biggest wave of volatility in months, but options traders show little appetite for more protection, a sign that at least some believe the sell-off current will be short lived.
The Cboe volatility index, known as Wall Street’s “fear gauge,” stood at 27.5 on Monday, its highest level in more than four months, as concerns over the Chinese real estate company weigh heavily. Evergrande indebtedness added to the nervousness of global growth. The S&P 500 fell 2.5% on Monday, the pace of its largest drop since January 27.
Options market analysts said there was little indication that investors were trading to protect their portfolios from further market declines, at least for now, however.
“The sale seems orderly to me, somewhat expected and don’t panic,” said Chris Murphy of Susquehanna International Group.
“The VIX and the futures structure and asymmetry… It was all price – in a degree of panic,” Murphy said, referring to various indicators of investor expectations for volatility.
The VIX has lingered around the 20 level in recent days, indicating high expectations for short-term market gyrations, even as stocks have remained near record highs. September has historically been a tough month for stocks, and the S&P has lasted more than 300 calendar days without a sell off of 5% or more.
Various measures of asymmetry, a measure of demand for put options relative to calls, have also been high for months, indicating increased investor expectation for a sharp pullback in stocks.
“It’s probably going to take a little over a day for everyone to start piling up in the hurdles,” Murphy said.
Instead, many investors appeared to be focused on harvesting gains on existing hedges that would have benefited from a decline in stocks, analysts said.
“Keep in mind that the market was extremely well hedged prior to this decline,” Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets, said in a note.
“We are seeing monetized hedges and investors are actually buying higher via buy spreads in S&P,” she said.
Buying upward call spreads is a relatively inexpensive options strategy that allows investors to benefit from a rebound in stock prices.
The stock market liquidations of recent years have been fleeting. This increases the urgency to monetize – or profit from – existing hedges before a rapid rebound in prices erases the gains, analysts said.
“The market liquidation which intensified overnight is mainly due to technical sell flows in a low liquidity environment and the overreaction of discretionary traders to perceived risks,” analysts at JP Morgan said in a brief. note.
They said they saw the sale as a buying opportunity.
(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Sonya Hepinstall)
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