Across U.S. exchanges last week, people bought 22 million more call contracts than they did puts, higher than the previous record set in June, according to Sundial Capital Research Inc. As stocks rose, dealers needed to buy more shares to hedge exposure, and at times were forced to turn to the S&P 500 and Nasdaq 100, so the thinking went. Then, to hedge, they bought implied volatility on the indexes too.
The VXN rose above 40 Thursday, the highest level since April.
“Any pivot off freshly made lifetime highs could be the beginning of a bear market,” said Michael Purves, chief executive officer of Tallbacken Capital Advisors. “But we suspect this is an overdue consolidation such as we had just after Jan. 2018 and at various other periods during the Nasdaq 100 bull run.”
Whether the ramp up in hedging beforehand lessens or accelerates the selling is yet to be seen.
“An interesting question will be whether the large expansion in Nasdaq 100 volatility will help buffer the downside move for this index but also across other assets classes,” Purves said. “If investors had protection, that should buffer the broader portfolio shock. On the other hand, the large dealer gamma from the large increase in option volumes also magnifies moves such as the one we are seeing right now.”
This article was provided by Bloomberg News.