VIX Traders Are Piling Into Bets That Fresh Stock Pain Is Ahead

(Bloomberg) — Volatility traders are putting their guard up just as US stocks bounce back, with options signaling the highest level of anxiety since right before the 2020 pandemic crash.

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The call-put ratio on the Cboe Volatility Index, or VIX, jumped Wednesday to levels unseen for some two and a half years, driven by bets on fresh market turmoil.

Options hedging is showing signs of revival after staying subdued during the recent equity selloff. The rush for protection reflects investor uneasiness in the face of the S&P 500’s longest streak of gains in three months.

With a cost measure of VIX options hovering near the lowest level since 2019, traders are likely taking advantage of what looks like cheap insurance against the next bout of market chaos.

The hedging activity stands out given the fact that the VIX, known as Wall Street’s fear gauge, failed to hit new highs since March even as the S&P 500 careened to fresh lows.

“VIX hedging hasn’t worked like you’d expect,” said Danny Kirsch, head of options at Piper Sandler & Co. “Implied volatility moves have been muted all year. It’s been a terrible hedge so far.”

Before this month, there were signs that professional investors were shunning equity options and instead flocking to stock futures to hedge positions.

Now, demand for options appears to be back. More than 440,000 VIX calls changed hands Wednesday, outpacing puts by a margin of 5.8-to-1. That’s the highest reading since January 2020.

The VIX fell for a second day, slipping to 25.91 as of 10:43 a.m. in New York, poised for a one-month low.

Stocks advanced for a fourth day amid optimism over China’s $220 billion stimulus plan. Despite the bounce, the S&P 500 is down about 18% this year as investors reassess equity valuations in light of the Federal Reserve’s aggressive plan to tighten monetary policy.