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Traders are piling into strategies that protect their share portfolios against “volatility spikes”, underscoring how concerns over US President Donald Trump’s policies have left investors on edge despite an upbeat start to the year for equities.
Investors have turned to derivatives markets to protect against large swings in US equities even as measures of Wall Street volatility remain subdued and stocks have crept modestly higher since last year.
The move to hedge against low probability but high impact shocks — known as “tail risks” — highlights how Trump’s erratic shifts in trade and economic policies have left investors uneasy even if many are still betting that the new administration will be a boon to corporate America.
“If you’re a money manager, do you shift your entire portfolio on the back of one headline? You can’t, because you don’t know if the headline is going to last. So what do you do? You use options,” said Mandy Xu, head of derivatives market intelligence at Cboe Global Markets, referring to tools that give holders the right to buy and sell shares at a preset price.
“People are nervous and reaching for tail hedges,” Xu added.
Maxwell Grinacoff, head of US equity derivatives research at UBS, said there had been “rampant” buying of options that would gain if the Vix index of short-term volatility in US stocks, often called Wall Street’s “fear gauge”, shoots higher.
The rush to buy these options has sent prices rising towards record highs even while the Vix itself sits well below its long-term average, Cboe data shows.
Demand for options that would become valuable if the blue-chip S&P 500 share index, which has risen about 3 per cent since the end of 2024, falls sharply has also boomed, according to Xu.
“The potential for volatility conditions to change quickly makes it harder for investors to wait for a sell-off to begin to add protection, so instead tail hedge prices have been staying high even when markets are strong and standard volatility metrics are low,” said Rocky Fishman, a derivatives analyst at research group Asym 500.
The bulk of the demand for options that pay out when the S&P 500 tumbles has come from retail investors, according to Xu. Institutional investors including hedge funds, pension funds and asset managers have tended to prefer Vix calls.
But retail investors are also flocking to riskier short-dated derivatives, which become worthless if target prices are not rapidly achieved. There had been a record high 2.4mn “zero-day” contracts tied to the S&P 500 traded on January 31, when Trump threatened to impose tariffs on some of the US’s largest trading partners.
Retail demand has been “tectonic” in recent weeks and reminiscent of the frenzied activity of the Covid-era meme-stock craze, said Charlie McElligott, a derivatives strategist at Nomura.
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