The S&P 500 fell nearly 2% on Friday, yet the VIX closed at 19.4 and traders did not pile into S&P 500 options. Analysts point to asset managers cutting stock exposure outright as one possible reason.
Stocks wrapped their worst week since June on Friday, but a group of options analysts say the reaction in the options market was oddly calm.
The VIX rolled over despite the sell-off
The VIX touched its highest intraday level since April on Friday, then retreated and closed at 19.4. The S&P 500 finished the day down nearly 2% over the same session.
For a decline that size, SpotGamma's Brent Kochuba called the 2.2-point move in the VIX relatively muted. His analysis of 126 selloffs since 2018 suggests the index should have jumped closer to 2.6 points.
Traders skipped the usual protection
In the Nasdaq 100, implied volatility rose for most options contracts, but there were exceptions. Put contracts between 20% and 50% out-of-the-money were higher on a volatility basis after the sell-off on Oct. 16, according to data from Nasdaq's Kevin Davitt.
Nomura managing director Charlie McElligott wrote that out-of-the-money S&P 500 puts are not being chased at this moment, which he reads as investor calm in the face of falling stocks.
Managers may be selling stocks instead of hedging
One explanation for the lack of hedging could be that asset managers are quickly selling stocks instead of buying options to protect them. Morgan Stanley's prime brokerage data on long-short active managers shows total global gross equity exposure down 8% from its most recent peak, the biggest drawdown in at least ten years.
According to Convexitas CIO Zed Francis, "Long/short has experienced a massive de-levering event". He believes that is the main reason implied volatility has stayed quiet during an increased-stress month.
Source: CNBC
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