The CBOE Volatility Index, or so-called VIX, and related exchange traded funds have seen some wild swings this year, and volatility traders are hedging against even bigger oscillations ahead.
Year-to-date, the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX)increased 19.6% and the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY)advanced 15.2%. Meanwhile, the CBOE Volatility Index is now hovering around the 25.9 level.
The call-to-put ratio on the CBOE Volatility Index, or VIX, surged Wednesday to levels not seen since before the COVID-19 pandemic as traders anticipate a severe market crash before settling down, Bloomberg reported.
The options hedging reveals signs of heightened anxiety after remaining relatively subdued during the recent equity selloff. In comparison, the VIX jumped to around the 85 level during the height of the COVID-19 panic selling.
The more recent renewed demand for protection reflects investor concerns in the face of the S&P 500’s longest streak of gains in three months, reflecting doubt about the longevity of the recent rebound.
Traders may also be taking advantage of cheaper insurance should the markets retreat as the cost measure of VIX options now trades near the lowest level since 2019.
The hedging activity also stood out since the VIX has not hit new highs since March even after the S&P 500 plunged to new lows this year.
“VIX hedging hasn’t worked like you’d expect,” Danny Kirsch, head of options at Piper Sandler & Co, told Bloomberg. “Implied volatility moves have been muted all year. It’s been a terrible hedge so far.”
Before this month, professional investors were avoiding equity options but turned to stock futures to manage risk exposure. However, demand for options now appears to have rebounded with over 440,000 VIX calls exchanging hands on Wednesday, compared to puts options by a margin of 5.8-to-1, or the highest reading since January 2020, reflecting increased demand to hedge against a downturn in the S&P 500.