By Saqib Iqbal Ahmed
NEW YORK (Reuters) – Traders on Friday piled into U.S. stock options contracts that would pay out if volatility jumped from the current four-year lows, even as the S&P 500 remained within striking distance of new highs.
Volume in options on the Cboe Volatility Index, which are typically used to guard against stock market gyrations, stood at 1.2 million contracts at 2:20 p.m. Friday, on pace for the highest level in about three weeks.
The index, known as “Wall Street’s fear gauge,” stood at 12.51 on Friday, just above the four-year low of 11.81 hit in late December after a searing late-year rally that helped boost the S&P 500 to a 24% gain in 2023.
With the S&P 500 less than 1% away from its January 2022 record closing high, some traders appeared to be taking advantage of relatively cheap pricing on defensive options contracts to pick up portfolio hedges.
The largest VIX trade on Friday was a $16.8 million purchase of 250,000 call options that would benefit from the volatility index rising above 17 by mid-February.
“I think it is one of the bigger VIX call purchases that we have seen in a while,” Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group, said. The trade was more likely to be a defensive play taking advantage of comparatively attractive volatility levels to add portfolio protection rather than an outright wager on a drop in the stock market, Murphy said. “It’s probably a big fund that might even be leaning very long, saying this is the most attractive hedge for us right now,” he said. The strength of hedging activity on Friday was in contrast to a generally anemic level of defensive trading in recent weeks.
Other February VIX call contracts, with strike prices ranging from 15 through 19 also saw heavy trading.
(Reporting by Saqib Iqbal Ahmed; Editing by Leslie Adler)