Skip to main content
Complete Olympic Games coverage at your fingertips
Your inside track on the Olympic Games
Enjoy unlimited digital access
$1.99
per week for 24 weeks
Complete Olympic Games coverage at your fingertips
Your inside track onthe Olympics Games
$1.99
per week
for 24 weeks
// //

Even with U.S. stocks scaling record highs day after day and Wall Street’s “fear gauge” showing a low level of worry, some corners of the options market indicate investors are growing much more fearful of a sharp pullback than they have been in months.

The Cboe Volatility Index, known as Wall Street’s fear gauge, is back near its postpandemic lows, showing little investor dread of near-term stock market weakness. But other, less obvious measures are flashing red, indicating concerns that the market could be in for a large drop.

It is unusually expensive, for instance, for investors to hedge their portfolios against a sharp decline in the S&P 500 than it is to buy options that would profit from a big gain.

Story continues below advertisement

A put option hedging against a 10-per-cent drop in the S&P 500 by August is about 35 times as expensive as a call option that would profit from a 10-per-cent rise. At the height of the stock market panic in March, 2020, that downside put option only traded as high as 11 times the upside calls, said Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets.

Nations TailDex, which measures the cost of hedging against a three-standard deviation move in the SPDR S&P 500 ETF Trust, is higher than it has been about 90 per cent of the time over the past five years.

That type of contrast between the VIX and other measures “is not terribly common,” said Randy Frederick, vice-president of trading and derivatives for Charles Schwab.

One explanation points to institutional investors – who Mr. Frederick said are more likely to hedge against a big market decline – moving to protect their downside, while retail investors keep betting on the market to grind higher.

Joe Tigay, portfolio manager at Equity Armor Investments, believes the market’s mixed signals on volatility mean that investors may run for cover at the first sign of trouble.

“My view is that the market is not as hedged as it should be,” Mr. Tigay said.

Some investors are on edge about the economic impact of the spread of the Delta coronavirus variant and worries about how the Federal Reserve will react to inflation and economic growth data, making it prudent to guard against a 5-per-cent to 10-per-cent drop in stocks, said Arnim Holzer, macro and correlation defense strategist at EAB Investment Group.

Story continues below advertisement

Many investors have also grown uneasy owing to the unusually long stretch of calm trading.

Since the Second World War, the S&P 500 index has had a decline of at least 5 per cent an average of every 178 calendar days, according to Sam Stovall, chief investment strategist at CFRA. The latest market advance has lasted 292 days without such a fall, the longest period since January, 2018, when a 715-day advance was followed by a 10.8-per-cent drop for the S&P 500.

Seasonality is also a factor. The period from mid-July through October has traditionally been the weakest time of the year for stocks, according to Jeffrey Hirsch, editor of the Stock Trader’s Almanac.

“U.S. equities have been incredibly resilient,” said Chris Murphy, co-head of derivatives strategy at Susquehanna Investment Group in a recent note to investors. “But with a seasonably weak period approaching and expectations ahead of earnings sky high, it’s worth looking at macro hedges.”

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies