Stock Market Disaster Hedges Are the Cheapest in Nine Years

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(Bloomberg) — Buying options to protect against a stock market plunge is the cheapest in nine years.

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As the Cboe Volatility Index — or VIX, which measures expected swings in equity markets — sank over the past couple weeks, so did an index tracking the implied volatility of VIX options, known as the VVIX. The VVIX finished Monday’s session just above 73, its lowest closing value since May 2015. Early in Tuesday’s session, the index advanced only slightly, holding well below its one-year average of 89.

The lower the implied volatility, the cheaper the options. So the drop in the VVIX shows traders aren’t spending money on VIX call options — often used as insurance against a major stock selloff given the VIX tends to spike when the S&P 500 slides.

The S&P 500 index was little changed early Tuesday after surging over the past two weeks amid strong corporate results and signs of a cooling labor market, which raises hopes that the Federal Reserve may cut interest rates this year.

The VVIX has “rarely spent much time below the ~80 level,” Christopher Jacobson, co-head of derivative strategy at Susquehanna International Group, wrote in a Tuesday note. Jacobson added that earlier this year, the VVIX closed below 76, prompting a VIX call buyer to snap up 250,000 contracts and bump up VVIX alongside it.

“While we aren’t predicting a similar outcome this time, we also would not be surprised to see opportunistic hedgers come in to take advantage of the low VIX/VVIX setup through call purchases,” he wrote.

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