© Reuters. WALL STREET: BEHIND THE RECORDS, INVESTORS INCREASINGLY CAUTIOUS
by Saqib Iqbal Ahmed
NEW YORK (Reuters) – Wall Street may well segue records on records and display a volatility close to its lowest in decades, the options market shows that investors are perhaps not as confident as it seems.
Having regard to the positions on options on the S&P 500 index and on the volatility index of the CBOE Vix, market participants have gradually strengthened their positions against a risk of a reversal of the indices, in the last few months.
“We do not see in the day to day operations and nobody seems to care about more than that hedging transactions but one way or another they are being put in place,” says Jim Strugger, a strategist on the derivatives at MKM Partners.
“It’s happening quietly, without shouting station.”
The S&P 500 has been about 16% since the beginning of the year and set a new record at the end of the session cut short Friday, above 2,600 points. It seems to be well on your way to record an eighth consecutive month in the green in November, its longest phase of sustained increase since the financial crisis of 2008.
The Vix index, sometimes also called the fear index, is also close to its record low, reached on 26 July to 8,84 falling 8,99 in the beginning of the month. He finished Friday to 9.67.
Some investors are warning that the extreme vulnerability to a shock of a market doped by the strategies, taking advantage of a quiet period new shares and, where the hedge strategies have served to nothing for months.
The overconfidence characteristic of the phases of boom should be at the top of investors ‘ concerns, felt the participants at the recent Summit Reuters about the investment Outlook for 2018.
The options market shows that they are not as vulnerable to a sudden market correction that the very low volatility might suggest.
On the markets of options on the S&P 500 index the ratio of put/call now appears to 2.1, close to the highest recorded over the past five years, according to data from the office of analysis specialized Trade Alert.
A purchase option (call) on an index gives the holder the right to buy the index at a level fixed in advance – the exercise price of the option, subject to the payment of a premium. The put options give a right symmetrical and are typically used to protect against a risk of a decline in the underlying index.
A part of the volumes on put options can be explained by the desire of investors to reap the corresponding premiums, but a sudden acceleration of activity on this type of instruments may also signal renewed appetite for positions of conservancy, to protect the gains with the rise in the index, according to analysts.
“More often than not, even in an environment like the one we currently know where it is so interesting to sell volatility, you can reasonably make the assumption that there are people who buy options,” said Jim Strugger.
The markets in options on the Vix is also characterized by a positioning that is also high on the calls out of the money, or contracts that are currently not profitable but would become if the volatility flew away.
“If the open position on the call options on the Vix out of the money is really high, I would tend to think that the market is clearly more inclined to cover” (against a risk of falling, editor’s NOTE), says Aashish Vyas, head of the investment strategy of Swan Global Investment.
“For me, it is more important than the absolute level of the Vix”, he added.
A STRONG BIAS DEFENSIVE
The positioning options on the index funds are traded as the SPDR S&P 500, the iShares Russell 2000 IWM, the PowerShares QQQ also shows a strong bias defensive.
Although this does not necessarily mean that the market is in danger of a crash in imminent, such as a sharp increase in the Vix could be fear, it also means that investors would not be caught short by a resurgence of volatility in the coming months.
“I don’t think the markets give way to an excess of confidence,” said Joe Tigay, head of trading at Equity Armor Investments. “Investors are protected against the risk of a decline” (markets).
In a recent article published on the website of the Federal Reserve bank of New York, the researchers of this branch of the u.s. central bank have stressed that in spite of a decline in the level of volatility reflected by the options of different maturities, investors associate a level of volatility much higher in the options of maturities as distant as options of shorter maturities.
This contrasts with the period before the financial crisis, during which investors demanded premiums for comparable enough to insure against the risk of an increase in volatility to one year to one month, taking it for granted that the calm prevailing on the markets would be maintained in the long term, are the authors of the article.
They conclude that this change in the assessment of risk, notwithstanding the low level of the Vix shows that investors are not so confident that that.
(Marc Joanny for French service, edited by Catherine Mallebay-Vacqueur)