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Hedging Shifts: Managers Cut Stocks Over Puts
3 Nov
Summary
- VIX index showed a muted rise during a significant stock market drop.
- Demand for protective put options was uncharacteristically low.
- Managers reportedly reduced stock exposure instead of buying hedges.
On October 30th, the U.S. stock market experienced a significant selloff, with the S&P 500 falling nearly 2%. Despite this decline, the Cboe Volatility Index (VIX) saw a muted rise, closing at 19.4. The VIX briefly touched its highest intraday level since April but retreated, showing a less pronounced reaction than historical selloffs of similar magnitude.
Analysis revealed selective demand for protective S&P 500 options. Specifically, out-of-the-money puts were not being heavily purchased. This phenomenon could be explained by managers opting to reduce their stock holdings instead of buying options for protection.
Global gross equity exposure among active long-short managers has seen its largest drawdown in at least a decade. This significant deleveraging suggests that managers, being closer to cash reserves, may not have felt the need to purchase hedging instruments like put options.
