US stocks investors opt for affordable options hedges as VIX nears four-year lows

Amid the S&P 500 hovering close to record highs, traders exhibited a surge in interest on Friday for US stock options contracts designed to pay off if volatility, measured by the Cboe Volatility Index (VIX), increased from its current four-year lows.

Options volume on the Cboe Volatility Index reached 1.2 million contracts by 2:20 pm on Friday, setting a pace for the highest level in about three weeks. 

The VIX, often referred to as "Wall Street’s fear gauge," registered at 12.51, just above the four-year low of 11.81 recorded in late December after a robust late-year rally propelled the S&P 500 to a 24 per cent gain in 2023.

Despite the S&P 500 being less than 1 per cent away from its January 2022 record closing high, some traders seemed to capitalise on the relatively inexpensive defensive options contracts to acquire portfolio hedges.

A notable VIX trade on Friday involved a $16.8 million acquisition of 250,000 call options, positioned to benefit if the volatility index rose above 17 by mid-February. 

Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group, highlighted this as a major VIX call purchase, suggesting it was likely a defensive play to leverage appealing volatility levels for portfolio protection rather than a straightforward bet on a stock market decline.

The heightened hedging activity on Friday contrasted with a generally subdued level of defensive trading in recent weeks. 

Notably, other February VIX call contracts with strike prices ranging from 15 through 19 also experienced robust trading.

(With Reuters Inputs)