By Vildana Hajric
(Bloomberg) – With a lumbering bear market whipping up volatility, the biggest traders are wringing stock options for all they’re worth.
The largest players on the options market bought more than $10 billion in puts on individual stocks last week, a record for that group and close to the most ever by any cohort of traders, according to Sundial Capital Research. The rush for protection came as the S&P 500 slumped into the weekend and the Cboe Volatility Index spiked above 32 to the highest level since June.
___STEADY_PAYWALL___Discerning a clear signal from any such action in the options market is nearly impossible. The flurry of buying could have been a straight grab for protection against further equity losses or an attempt to exploit anomalies opening up as markets lurch from one massive move to the next. But the sheer volume is another indication that markets in 2022 have started trading in ways comparable to some of the worst periods in recent history.
“If the trades are due to relatively few trades on a few stocks, e.g. a part of some huge complicated arbitrage or other strategy,” then there might be no takeaway from the data, Jason Goepfert, chief research officer at Sundial, said. “It doesn’t seem to be the case, though, so the suggestion is that they are betting very heavily on a severe, sudden decline.”
Goepfert allowed that there was also a surge in activity in call options, but held that even the total option activity “is still far beyond anything seen before.”
When his firm netted out speculative activity from the data and compared it to other periods relative to market capitalization, the closest analog is the week that ended Oct. 10, 2008. The S&P 500 surged 20% from the low of that week over the following 17 trading days before falling 12% into late November. It didn’t reach a bottom for another 100 days.
The wild market swings that characterize 2022 are creating opportunities in options markets that have lured in traders using complicated strategies. These include structured deals where institutional investors use options to place bets ahead of certain corporate events.
Looking at raw volume in puts and calls is only one way to gauge sentiment. Other indicators aren’t showing as dire a reading as the data compiled by Sundial. The Cboe Volatility Index, or VIX, the most widely cited such reading, has held in the low 30s — about 10 points higher than its long-term average but far below levels reached during other times of stress.
And the skew of the S&P 500 — a measure of the cost of bearish versus bullish contracts — is well below its 2022 highs.
Though the S&P 500 over the course of Monday and Tuesday last week rallied nearly 6%, traders became increasingly nervous as the days went on that a continually aggressive Federal Reserve could be deleterious for the economy. US central bankers appear to be readying their fourth straight 75 basis-point increase in interest rates when they meet Nov. 1-2 as they try to slow the economy and lower inflation.
Meanwhile, warnings from Corporate America are also starting to sound more dire. FedEx Corp. is slated to soon update expectations to account for softening economic conditions that are anticipated to erode shipping volumes, according to a report last week. Meanwhile, chipmakers are warning that demand has been sputtering, with Samsung Electronics Co. and Advanced Micro Devices Inc. all recently posting disappointing results.
Stocks dropped for the fourth straight day Monday. In another sign of trader angst, the Cboe equity put/call ratio has soared once again after declining at the start of last week.
“This week will be a very volatile week,” Shawn Cruz, head trading strategist at TD Ameritrade, said in an interview at Bloomberg’s New York office. “As we hear from Fed speakers this week, and you’re just getting some really big data points ahead of what’s a pretty reliable 75-basis-points rate hike, with the opening salvo from the earnings season coming from the banks, that’s going to drive a lot of volatility.”
–-With assistance from Lu Wang.
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