Puts Abandoned in Calmest Stock Market in Two DecadesLu Wang and Eric Lam
For 40 days, the Standard & Poor’s 500 Index has failed to post a gain or loss exceeding 1 percent, the longest stretch of calm since 1995. That’s squashing demand for options that protect against turbulence.
For every 100 bullish calls trading on the Chicago Board Options Exchange in the 10 days through June 11, 80 puts to sell changed hands, the fewest since January, data compiled by Bloomberg show. The measure tracking options on individual equities and indexes shows traders abandoning bearish bets as the S&P 500 steadily climbs higher.
Interest in bearish options is evaporating amid a rebound in small-cap and technology companies and four straight months of S&P 500 gains that lifted the index above 1,900 for the first time. Confidence in the bull market is increasing as the European Central Bank moved to negative interest rates and U.S. payrolls climbed above their pre-recession peak.
“Central banks have a calming effect on the market,” Kristina Hooper, a U.S. investment strategist at Allianz Global Investors in New York, said in a phone interview last week. The firm oversees $493 billion. “You’re seeing right now upside potential in that economic data is improving, so there is less need for puts.”
The S&P 500 has gone without a 1 percent move since April 16, the longest stretch since 1995, according to data compiled by Bloomberg. The benchmark index for U.S. equities rose or fell an average 0.53 percent a day this year, the smallest fluctuation since 2006, the data show.
The last time the CBOE’s put-call ratio was lower than 0.8, in January, the S&P 500 was in the middle of a drop that reached 5.8 percent through Feb. 3. The index has since recovered the decline with an 11 percent surge.
During times of market turbulence, investors turn to put options and securities linked to the CBOE Volatility Index because their value tends to rise when stocks fall. The VIX, based on S&P 500 options prices, has dropped 43 percent from a peak in February. It hit a seven-year low of 10.73 on June 6.
The VIX rose 5.6 percent to 12.86 at 11:38 a.m. in New York while the S&P 500 slipped 0.2 percent. Its European counterpart, the VStoxx Index, rose 8.6 percent to 15.37.
“There’s not a lot of disagreement or concern about what’s occurring in the U.S. economy,” Robert Stimpson, a fund manager at Oak Associates Ltd. in Akron, Ohio, said in a June 12 phone interview. His firm manages about $1 billion. “The correction we had coming out of the first quarter, we’ve recovered quite a bit of that and we’re seeing complacency return to the market.”
Jeffrey Burchell, co-chief investment officer of Aston Hill Financial Inc. in Toronto, said his firm has bought calls on the VIX and puts on some ETFs because they’re inexpensive. Bearish bets on SPDR S&P 500 ETF Trust, the largest exchange-traded fund tracking American stocks, are cheaper now than 94 percent of the time since the bull market began in 2009.
Puts with an exercise price 10 percent below the S&P 500 ETF cost 7.03 points more than calls betting on a 10 percent rally, according 60-day implied volatility data compiled by Bloomberg. The spread, known as skew, has averaged 9.64 points in the past five years.
“We’re buying protection, not because we’re negative, but because it’s so cheap that why wouldn’t we?” Burchell, who helps oversee about C$7 billion ($6.5 billion), said by phone on June 12. “That will pay at some point in the next couple of years.”
U.S. stocks fell last week as lower estimates for global growth and escalating violence across Iraq halted a three-week rally. The S&P 500 slid 0.7 percent, led by a 7.1 percent retreat in Delta Air Lines Inc. shares as oil surged to an eight-month high.
The S&P 500 has risen for 32 months without a decline of 10 percent or more, versus the average of 18 months since 1945, according to data from S&P Capital IQ strategist Sam Stovall. In 2011, the S&P 500 index tumbled 19 percent from April through October, the closest the market has come to ending the bull market.
“People may be buying protection at a very good price, but maybe protection they don’t need,” John Manley, New York-based chief equity strategist at Wells Fargo Funds Management, said in a phone interview on June 12. The firm advises $226 billion. “Look what a five, six percent correction did in January. It really shook out a lot of people who had become complacent and within a short period of time, the market was roaring back.”