Stock market investors who have been reluctant to hedge their portfolios in the face of this year’s gains are starting to reconsider that strategy.

Heightened geopolitical risks are stoking market fear as Middle East tensions intensify, while the realities of the Federal Reserve keeping interest rates higher for longer are starting to settle in, sending the S&P 500 Index down 3.2% for April and putting it on pace for its first monthly loss since October. The mounting uncertainties have traders buying put options that pay off if stocks keep tumbling.

“It’s not too late to protect against further risk escalation,” said Nitin Saksena, head of U.S. equity derivatives research at Bank of America. “You have to be a little bit thoughtful about how you hedge, and where you hedge.”

Take Mike and Matt Thompson, portfolio managers at Little Harbor Advisors in Marblehead, Massachusetts. The brothers said they don’t always maintain hedges, but over the past couple of weeks, they’ve bought VIX futures to protect against a spike in volatility. 

“We’re at a yellow light,” Mike Thompson said, “a time to be cautious and accumulate some protection.”

On Friday, the Cboe Volatility Index—also known as the VIX, which is a measure of the 30-day implied volatility of the S&P 500—traded above the key 20 marker for the first time in six months and hit its highest level since October. The index is on track to close above its 200-day moving average for 15 consecutive sessions, its longest streak since October 2022. 

The rising demand for insurance is driving up costs on broad market hedges that pay off if stocks fall further, and that’s been particularly evident in contracts that expire in a few months. A gauge of implied volatility in a 25-delta put expiring in June, for instance, has jumped as much as 30% since late March, signaling traders’ desire for near-term hedges.

Cheap Options
The higher premiums are coming off historical lows, as broad market hedges sold for their cheapest in years to start the year. In general the cost of options contracts remain very low. So investors concerned about anything—geopolitics, elections, earnings—still have time to grab cheap insurance.

What form that protection takes depends on the trader. While the Little Harbor brothers turned to VIX futures, BofA’s Saksena noted that one-year put options and put spreads tied to the S&P 500 are cheap, with prices in the bottom decile over the past 15 years.

Puts connected to Invesco QQQ Trust Series 1 ETF (ticker QQQ), which profit if the Nasdaq 100 dives, are among the plays favored by Michael Purves at Tallbacken Capital. His logic is simply “if you think that pan-asset selling is coming, then what rallied the most will be sold the most,” he said.

For professional hedgers and portfolio managers alike, the question of insurance comes down to where the buyer thinks the equities selloff is right now. If a trader believes stocks are on the cusp of a rebound, why bother hedging?

The risk, of course, is the unforeseen suddenly appearing. While Solita Marcelli, chief investment officer at UBS Wealth Management Americas, does not believe a stock market collapse is imminent, she thinks equities could prove sensitive to negative news, particularly with valuations still elevated. That’s where a little insurance can be beneficial.

“We tell our clients that if they’re nervous about markets, it’s better to put some hedges in place versus selling out completely,” said Marcelli.

This article was provided by Bloomberg News.