Options Traders Wrestle With Stocks’ Muted Reaction to War Risk
“On the more tactical side there is a general lack of scalable opportunities across the board on repo, correlation and volatility — historic dislocations are just not there at the moment,” Antoine Porcheret, head of institutional structuring for the UK, Europe, Middle East and Africa at Citigroup Inc., said last week. “But that is part of a deeper long-term trend, notably in retail structured products, which historically was the main supplier of derivatives risks.”
JPMorgan Chase & Co. strategists, who noted on June 11 that investors’ fatigue has set in after the many Trump U-turns, say the July 9 deadline could be postponed, which would create further uncertainty and make it difficult to trade with conviction. Dealing has already shifted to near-term maturities: S&P 500 options volume has dropped since May, with the share of zero-days to expiry contracts reaching a new peak of 59%, a separate JPMorgan report showed last week.
One sign that there is a bit more concern among equity traders: The Cboe VVIX Index, measuring the volatility of the VIX, has increased to the higher end of its range over the past year, signaling more interest in buying options for portfolio protection against drastic swings.
The conflict, and the muted reaction in stocks, has driven implied volatility for the US Oil Fund relative to the SPDR S&P 500 ETF to the highest level since the early days of Covid in 2020. That’s led banks to pitch more dual-binary hybrid trades between oil and equities.
“In such geopolitical and macro environment, hybrids have been a natural tool to use, with recent activity around the oil theme played versus equities (and FX) through directional and volatility trades,” said Alexandre Isaaz, head of EMEA equities derivatives sales and structuring at Bank of America Corp.
To reduce risk while keeping their views, some buy-side investors are using strategies such as stock replacement — when an equity position is put on with options instead. One trader alone spent as much as $3 billion in premium on 2027 calls across a slew of large-cap US companies in recent months.
“I don’t sense much fatigue from hedge funds, they are still actively looking for opportunities. On the vol carry side within the QIS space there is still demand,” said Porcheret. “The market is generally underinvested, so the pain trade remains to the upside.”
--With assistance from Bernard Goyder and Sagarika Jaisinghani.
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