Demand for crash protection soared last week, according to Cboe data
Options traders are hoovering up contracts that would pay off if the S&P 500 were to crash.
Options traders are bracing for a looming stock-market crash, the latest data from Cboe Global Markets shows.
A dispatch from Cboe Global Markets’ Mandy Xu, shared with MarketWatch on Monday, revealed that demand for deep out-of-the-money call options tied to the Cboe Volatility Index (VIX) — otherwise known as the VIX, or Wall Street’s ”fear gauge” — surged last week.
The spike in demand coincided with popular US. stock-market gauges like the S&P 500 and Nasdaq Composite capping off their worst two-week run since September, Dow Jones Market Data showed.
Traders appeared to monetize — that is, take profits —from put options tied to the S&P 500, as the index’s latest struggles pushed many of those contracts into the money. That caused “skew” for S&P 500 put contracts — which measures demand for further out-of-the-money contracts against those that are closer to paying off — to ease somewhat.
But at the same time, demand spiked for deep out-of-the-money VIX calls — bullish contracts tied to the VIX that would pay off if the gauge soars above 50 — signaling that there was still plenty of demand for crash protection.
“In fact, Thursday was the second-highest volume day on record for buying of high-strike (50+) VIX calls, with a customer buying over 260,000 of the May 55-75 strike calls … for total cost of $10.7 million,” Xu said in the report shared with MarketWatch.
Indeed, Cboe data showed net customer buying of deeply out-of-the-money VIX calls soared to nearly 250,000 contracts, the largest one-day reading since May 4, 2023, a representative from Cboe said.
The VIX briefly surged above 50 in the premarket session on Aug. 5, when a U.S. growth scare and the sudden unwind of the Japanese yen carry trade hammered global markets, sending the Wall Street fear gauge north of 65 on an intraday basis for the first time since April 2020.
However, the index eventually finished the day at around 38. Some speculated that the early spike was likely driven by liquidity issues across derivatives markets.
The VIX hasn’t finished above 50 since March 2020, according to FactSet data.
The index finished Friday just below 20, a level that is roughly on par with its long-term average. For volatility traders, the 20 level on the VIX carries a lot of weight: Above 20, markets are said to be unsettled; below it, they’re seen as calm.
U.S. stocks struggled on Monday after the latest manufacturing report from the Institute of Supply Management showed activity contracted in February. That helped send the Atlanta Fed’s GDPNow forecast for first-quarter GDP to minus 2.8%. If that comes to pass, it would mark the first quarterly contraction in U.S. economic activity since early 2022. The market’s slide intensified Monday afternoon after President Donald Trump confirmed 25% tariffs against imports from Canada and Mexico, and additional 10% tariffs on Chinese goods, would take effect Tuesday.
The S&P 500 fell 104 points, or 1.8%, while the Nasdaq Composite was off by 497 points, or 2.6%. The Dow Jones Industrial Average tumbled 649 points, or 1.5%.
Cboe also revealed that trading activity in so-called “zero day” options tied to the S&P 500 index soared in February to its highest level on record. Trading in contracts on the verge of expiring accounted for 56% of activity in all S&P 500-linked contracts last month.
In options trading, calls are bullish contracts that would pay off if the underlying asset or index were to rise past a certain level, known as the “strike price.” Puts, on the other hand, represent bearish bets or hedges that would pay off if the underlying asset or index falls below the strike.
In the case of contracts tied to the VIX, calls would most likely pay off if the S&P 500 were to see a sudden sharp drop. Given that the VIX is a volatility gauge, it typically spikes when the market is in turmoil.
In both cases, the underlying would need to move beyond the strike price by a wide enough margin to compensate the contract holder for the premium paid.
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