The volatility of U.S. stocks has significantly decreased, and traders are profiting from it
The volatility of the US stock market has significantly decreased, with the Volatility Index (VIX) falling below 13, the lowest since July. Traders are profiting by shorting put options on the S&P 500 index, with the Sharpe ratio of the options strategy rising to 19 points. The assets under management of derivative income funds have reached $260 billion, while the assets under management of ETFs with options selling strategies amount to $95 billion. A Goldman Sachs report indicates that options traders can profit $10 billion for every 1% movement in the S&P 500 index, providing additional support to the market
According to Zhitong Finance APP, the Volatility Index (VIX) has fallen below the bottom, and traders are enjoying it. Data shows that the VIX index dropped below 13 on Wednesday, the lowest level since July. Investors are still closing out remaining hedging positions related to the U.S. elections while chasing exposure before the end of the year, leading to a surge in options selling and suppressed market volatility.
Charlie McElligott, a cross-asset strategist at Nomura Securities, stated in a report that systematically shorting S&P 500 put options and hedging options daily is more attractive than simply buying stocks. He added that the Sharpe ratio (a measure of risk-adjusted return) for these options strategies has risen to about 19 points, while the Sharpe ratio for holding stocks is 15 points.
Nomura Securities data shows that the so-called derivative income funds' managed assets have surged to about $260 billion, while the managed assets of exchange-traded funds (ETFs) employing options selling strategies amount to $95 billion. As a side effect, realized volatility has declined, leading funds that take on risk using volatility to further increase their risk exposure and support the market through stable stock purchases.
Meanwhile, options traders are still bullish on Gamma. Goldman Sachs stated in a report that for every 1% movement in the S&P 500 index, options traders will profit $10 billion. As traders buy on dips to rebalance positions, this will provide additional cushioning for any market weakness. Goldman Sachs tactical expert Scott Rubner noted that the volatility market is now a major player, pointing out that the two-week actual volatility of the S&P 500 index "has moved away from the bottom of my five-year chart."