"The S&P 500 may be giving investors a false sense of calm,” Brian Garrett says.
Garrett, who oversees equity execution on our cross asset sales desk, says that while the S&P 500’s dependable-looking rally is supported by strong economic data and earnings, “there is something going on under the surface.”
Garrett points out that the options-selling funds are grown dramatically in size. Their sales tend to compress volatility, since the buyers of these options are market-makers who hedge their exposure by selling the index when it rises, and buying when it falls.
This behavior pushes the market into a tighter range. That’s “one reason why we've seen the S&P relatively quiet, while there have been large moves in individual stocks,” Garrett says.
The systematic selling of these options also drives down the prices of portfolio hedges, which rise in value when stocks decline.
“It hasn't been cheaper to hedge a portfolio in the last decade,” Garrett says. “So for those worried that volatility could return: You've got options.”
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