Traders are buying VIX call options in droves! Strategist Warns: May Become an Important Driver of US Stock Volatility

The Zhitong Finance App learned that strategists warned that hedging US stock market risks by buying volatile index bullish options has become a very popular trade, and this may become an unstable factor. Data shows that on Tuesday, the Chicago Board Options Exchange Volatility Index (VIX) traded more than 1 million shares, reaching such a high volume for the sixth time this year.

Charlie McEligott, a cross-asset strategist at Nomura Securities, said in a report this week that these new deals made options traders “extremely bearish on VIX gamma.” He estimated that for every 10 points increase in volatility, traders would have to buy about $150 million in Vega (the sensitivity of the option price to the volatility of the underlying asset price).

Charlie McEligott said this means traders are preparing for a possible Volatility Squeeze (Volatility Squeeze) in the US stock market, laying the groundwork for a larger risk reduction event. Although the market is yet to experience extreme volatility, he called the current position distribution a “hypothetical yet unsettling stress test,” simulating the ripple effects that a sudden surge in volatility could trigger. He said, “If the VIX Index rebounds near the March expiration date, market makers and hedge institutions will be forced to buy VIX Index futures to maintain hedging, and the volatility of the Volatility Index may soar again.”

While Charlie McEligott issued a warning, investors are still bullish on US stocks overall. The S&P 500 closed at a record high on Wednesday. Exposure to hedge funds and leveraged exchange-traded funds (ETFs) expanded, cash levels in mutual funds were low, and demand from retail investors was high.

Scott Rubner, a strategist at Goldman Sachs and managing director of global markets, warned last week that the US stock market is about to face a round of decline. He said that the current market participants are becoming saturated, and the motivation to buy on dips is weakening. He stated, “Everyone has entered the market, including retail traders, 401 (k) capital inflows, asset allocations at the beginning of the year, and corporate capital. The dynamics of funding requirements are rapidly changing, and we are approaching a seasonal negative phase.”