Traders are aggressively buying VIX call options! Strategists warn: it may become an important driver of volatility in the US stock market
Strategists warn that investors buying VIX call options to hedge against stock market risks may lead to market instability. Data shows that the trading volume of VIX call options has exceeded 1 million contracts, and traders need to prepare for rising volatility. Although the market has not yet experienced extreme fluctuations, strategists believe that the current position distribution could trigger a chain reaction, and if VIX rebounds close to the expiration date, volatility may surge again. Meanwhile, investors remain bullish on U.S. stocks, but market participants are becoming saturated, and the motivation to buy on dips is weakening
The Zhitong Finance APP learned that strategists warn that buying call options on the volatility index to hedge against risks in the U.S. stock market has become a very popular trade, which could turn into an unstable factor. Data shows that on Tuesday, the volume of call options on the Chicago Board Options Exchange Volatility Index (VIX) exceeded 1 million, marking the sixth time this year that such high volume has been reached.
Charlie McElligott, a cross-asset strategist at Nomura Securities, stated in a report this week that these new trades have made options traders "extremely bearish on VIX gamma." He estimates that for every 10-point increase in volatility, traders must buy about $150 million of Vega (the sensitivity of option prices to changes in the volatility of the underlying asset).
Charlie McElligott indicated that this means traders are preparing for a potential volatility squeeze in the U.S. stock market, laying the groundwork for larger de-risking events. Although the market has not yet experienced extreme volatility, he referred to the current position distribution as a "hypothetical but unsettling stress test," simulating the chain reaction that a sudden spike in volatility could trigger. He stated, "If the VIX index rebounds close to the March expiration date, market makers and hedging institutions will be forced to buy VIX futures to maintain their hedges, and the volatility of the volatility index could surge again."
As Charlie McElligott issued his warning, investors remain generally bullish on U.S. stocks. The S&P 500 index closed at a record high on Wednesday, with hedge funds and leveraged exchange-traded funds (ETFs) expanding their exposure, mutual funds maintaining low cash levels, and retail investor demand remaining high.
Scott Rubner, a strategist and managing director of global markets at Goldman Sachs, warned last week that the U.S. stock market is about to face a downturn. He noted that current market participants have become saturated, and the motivation to buy on dips is weakening. He pointed out, "Everyone is in the market, including retail traders, 401(k) inflows, year-to-date asset allocation, and corporate funds. The dynamics of fund demand are changing rapidly, and we are approaching a seasonally negative phase."