Nervous stock market breaks derivative trading record

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Investors are competing to protect their portfolios from damage as volatility dominates Wall Street, and traders are flying stocks up and down in preparation for tighter policies from the Federal Reserve.

Put options contracts, which can prevent losses due to falling stock prices, were in great demand at the beginning of the week when the S & P 500 Benchmark Index for US equities fell 10% from recent highs.

According to Bloomberg data, traders bought 31.3 million equity put options contracts that day and a record high of 32.3 million contracts set on Friday. Both days far exceeded the previous record of 26.7 million contracts set in February 2020, when the coronavirus pandemic began to upset US financial markets.

The rapid recovery of hedging activity has created a significantly nervous mood among investors of all sizes in early 2022 as the Fed is preparing to reduce the stimulus it has sent to the financial system since the outbreak of the pandemic. Reflects.

“One of the key themes that emerged in the first few weeks of this year is the reproduction of hedging activity,” said Amy Wu Silberman, RBC option strategist. “I think there’s more to the general uncertainty we see when the Fed begins to move. [tail risks] Exists this year. “

Monday’s S & P 500 fell by more than 10% temporarily from a record known as a revision, eventually closing at a daily high and the market changing drastically, the biggest daytime move since March 2020. Was recorded. However, turning around again on Tuesday morning, Nasdaq fell about 2%. Markets that have been tackling the looming changes in FRB policy for months have also begun to address the geopolitical tensions of Russia and Ukraine and the impact of Omicron coronavirus variants on global growth.

According to data from Cboe Global Markets, the monthly average of options traded in the US on Monday was $ 25.3 billion, compared to $ 53.7 billion.

In part, this shows how much the options market (formerly a protected area for professional traders) has changed in the last few months. Trading on these contracts has skyrocketed over the past year as new retail investors flock to contracts with free meme stocks that have attracted millions of people to the US financial markets. However, many of these new day traders have been attracted to equity call options (betting that stocks will go up) since the end of last year. More and more put hands..

Its activity has skyrocketed since tech stocks peaked in November when the Federal Reserve indicated its intention to tighten monetary policy. Nasdaq Composite Index fell 15% from record highs, Thousands of stocks The index is down more than 20%.

New equity put contracts since Monday, according to traders, given that some investors previously bought contracts on the same day and sold them quickly to profit from price fluctuations in derivatives. Notice that the number remains unpaid. ..

Jason Hedberg, Global Head of Equity Derivatives Sales at UBS, has unpaid put options linked to one popular exchange-traded fund, Invesco’s $ 187 billion QQQ fund that tracks the Nasdaq 100 Index. Interest is in the last few years, even if put trading volumes have increased.

“What it tells me is that it’s not well protected,” he said. “Everyone stays a little more exposed as they sell out,” he added.

Cboe’s Vix index, one indicator of equity volatility, temporarily reached its highest level since October 2020 on Monday, and the index’s options activity has grown exponentially. Cboe, the largest options exchange in the United States, said Monday that the total number of contracts traded in the US market was 61.4 million, more than 60% above the recent average. Call and put trading were similar volumes, he added.

Brian Bost, co-head of Barclays’ North and South American equity derivatives, said in light of recent slides that some institutional investors will reduce their equity exposure rather than just rotating between sectors. Said that. market.

“Volatility becomes unhealthy, risk transfer becomes very difficult, and the drawdowns taken by some of these funds have factors that ultimately lead to reduced activity, and we are inflections on them. I’m around the dot, “he said. “I haven’t slept a little at night.”

Nervous stock market breaks derivative trading record

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The post Nervous stock market breaks derivative trading record appeared first on Eminetra.

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