Seasoned investors, staring at a world clouded by war, inflation and economic uncertainty, are buying catastrophe insurance at a record clip.
Institutional traders paid $8.1 billion to initiate purchases of equity puts last week, the highest total premium in at least 22 years, Options Clearing Corp. data compiled by Sundial Capital Research show. Adjusted for market capitalization, demand for hedges matches levels from the 2008 financial crisis.
The spree is the latest evidence of sky-high anxiety on Wall Street in a market where strategists at firms from Morgan Stanley to Goldman Sachs Group Inc. are warning that the 2022 bear market has yet to see its bottom. Cash holdings rose in mutual funds and hedge funds cut equity holdings to multi-year lows. While all the bearishness set the stage for a short squeeze on Wednesday, it nevertheless speaks of extreme fear among pros.
“They’re buying protection against a crash at a pace unlike anything the market has ever seen,” said Jason Goepfert, chief research officer at Sundial. “The sudden and massive hedging activity of some of the market’s largest traders is unsettling.”
By contrast, demand for bullish options is dwindling. At less than $1 billion, the total premium on calls last week fell to the lowest level since the immediate aftermath of the 2020 pandemic meltdown, Sundial data show.
Driving the surge in puts is demand for single-stock options, according to Brent Kochuba, founder of SpotGamma. With the Cboe Volatility Index and puts linked to indexes like the S&P 500 failing to offer buffers this year, investors are increasingly gravitating toward contracts linked to individual shares.
Rising appetites for protection are visible in the Cboe equity put-call ratio’s 5-day average, which has spiked lately to levels almost never seen since March 2020.
“There is an increase in put buying for ETFs and indicies too. It’s just much more pronounced in equities,” said Brent Kochuba, founder of SpotGamma. “That is because it may be easier to short stocks that are weakened by the macro environment and you get more volatility there too. It’s arguable that index put options are a good buy here based on where realized volatility has been.”
The burst in put activity is viewed in some corners as a source of potential volatility. Market makers who sold these contracts would need to buy or sell underlying stocks to maintain a neutral market exposure. Right now, they’re mired in a “short gamma” stance that requires them to sell stocks when they fall and buy them when they rise, according to Charlie McElligott, a cross-asset strategist at Nomura Securities International. The setup contributed to the S&P 500’s 1.8% jump Wednesday, he said.
One force underlining the sudden demand may be institutional investors looking to protect their stock holdings. Hedge funds, for instance, have spent the past two weeks buying shares of individual companies, data from Goldman Sachs Group Inc.’s prime brokerage show. Those new positions would require fresh hedges.