Volatility Indicator Expert: Don't Let the US Stock Market Rebound "Cloud Your Judgment" to Quickly Buy S&P 500 "Downside Protection"
U.S. stocks have recently rebounded, but market observers warn investors not to be overly optimistic and suggest buying "insurance" in the options market to guard against a potential market downturn. After the S&P 500 index rebounded by 10%, the prices of related put options have fallen to their lowest level since April. Although the market is optimistic about Trump potentially easing trade policies, tariff issues remain unresolved and could impact the economy. The S&P 500 index has risen for five consecutive trading days, and the fear index has also decreased
According to the Zhitong Finance APP, U.S. stocks have just rebounded strongly from their lows, but some market volatility observers are warning not to celebrate too early. Analysts from Susquehanna International Group and TD Securities are urging investors to buy "insurance" in the options market to guard against the stock market falling back to the lows seen earlier this month.
After the S&P 500 index rebounded 10% from its April lows, these hedging tools have become cheaper. The one-month put options used to hedge against stock market declines are currently at their lowest price level since April 2, when President Donald Trump announced a massive tariff policy, compared to call options that profit from rising stock prices.
Options experts point out that while the market cheers signs of Trump being willing to ease his tough trade policies, it remains unclear how the tariff issues will be resolved and what damage they will ultimately cause to the U.S. economy. Tariffs on China remain as high as 145%, with little hope for a short-term resolution, while the three-month tariff suspension measures for other countries will expire in July.
Rocky Fishman, founder of research firm Asym500 LLC and former head of index derivatives strategy at Goldman Sachs, stated, "Many critical economic questions remain unresolved, whether related to the severe tariff situation with China or the overall 10% tariffs. I believe the market is underestimating the potential impact of these issues on investor confidence."
Indeed, not everyone is calling for increased portfolio protection. After the S&P 500 index fell to the brink of a bear market this month, it has recovered about half of its losses, and bullish investors firmly believe that if the market falls sharply again, the White House is likely to further ease trade policies.
Continuous Uptrend
The S&P 500 index has risen for five consecutive trading days, marking the longest winning streak since last November. The Cboe Volatility Index, which measures demand for hedging against stock market volatility, is currently at 25, down from a high of about 60 on April 7.
Meanwhile, Mandy Xu, head of derivatives market intelligence at Cboe Global Markets, pointed out that demand for so-called "tail risk protection" (insurance against unlikely events that could have catastrophic consequences) has declined in recent weeks.
In a report released on Monday, she wrote that this is "a sign of investor confidence in 'Trump put options.'"
However, other market participants have a different view. Fishman from Asym500 LLC noted that realized volatility (which measures past price fluctuations) is far higher than implied volatility (which reflects expectations of future market fluctuations). In his view, this indicates that investors may have let their guard down, despite facing more potential variables in the trade war and a series of corporate earnings reports and economic data tests Joseph Ferrara, an investment strategist at Gateway Investment Advisers, stated that after profiting from selling derivatives during the peak of market volatility in early April, the company plans to buy put options again.
In addition to the uncertainty of the global trade war, Ferrara is also concerned that the summer trading lull may exacerbate market volatility and push up overall volatility.
Christopher Jacobson of Susquehanna suggested that clients who are "worried that the recent rebound is just another dead cat bounce in a bear market" should hedge at current levels.
He wrote last week, "The ultimate outcome of tariffs, consumer spending power, corporate earnings, and other issues still exist. The recent gains have mostly been achieved with generally low trading volumes, and some believe this rebound is more due to short covering."
Meanwhile, Ling Zhou, an analyst at TD Securities, is more concerned about the outlook for the next 6 to 9 months, as economic risks may arise during this period. He suggested selling S&P 500 call options expiring in October and using the proceeds to buy put options
