The S&P 500 is 6 per cent higher from its October lows after notching its biggest weekly gain in nearly a year on expectations that the US Fed is unlikely to hike interest rates further
Fear has plunged in the U.S. equity market after last week’s rally, and some options mavens are urging clients to stock up on portfolio protection while it is cheap.
The S&P 500 is 6 per cent higher from its October lows after notching its biggest weekly gain in nearly a year on expectations that the US Fed is unlikely to hike interest rates further as it looks to engineer a so-called soft landing, where it is able to beat inflation without badly hurting growth.
In the meantime, the Cboe Volatility Index, known as Wall Street’s fear gauge, has dipped to its lowest level in seven weeks. The cost of hedging against a decline in stocks has also dropped, suggesting limited demand for downside protection: investors looking to protect their portfolios against a 5 per cent decline in the S&P 500-tracking SPDR S&P 500 ETF Trust through the end of the year are paying about half of the price demanded just two weeks ago, according to a Reuters analysis.
We are seeing a market where everyone is almost presuming that we are going to have a soft landing, that there is going to be a Santa Claus rally through the end of the year, said Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald, referring to the historically strong performance of U.S. stocks towards year-end.
Strategists at Barclays also called out the dramatic drop in the VIX from October levels, which were the highest in seven months. Markets appear “too optimistic,” the strategists stated in a note Tuesday.
They recommended taking advantage of the decline in volatility to deploy stock replacement trades, which involve swapping long stock positions for cheap call options that would reap gains if the market continued to rally.