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watch nowVIDEO01:13Options Action: AI Scares Prompt Big TradingOptions Action
When it comes to two of the main threats to the U.S. stock market right now, traders in the options pits are making it clear which boogeyman is scarier and and potentially more disruptive to the AI trade.
Volatility measured by the Cboe VIX Index jumped to 18 Monday and options trading on the gauge surged to more than double the 30-day average volume as semiconductors and data-center stocks dragged on the S&P 500 Index. Their poor action followed a renewed debate among tech leaders and politicians over whether the artificial intelligence buildout is happening too fast.
By midday, three of the top five VIX contracts to buy were calls, and the biggest trade of the day was someone purchasing at least $3.6 million of the 31-strike calls expiring mid-November.
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Cboe Volatility Index, YTD
It was close to the opposite on Friday, when the ‘VIX’ erased two days of gains despite inflation data that sent the odds of an interest-rate hike by the Federal Reserve at this week’s meeting to 90%. By the close on Friday, options on the S&P 500 were pricing a swing of 0.8% into weekly contracts expiring Sep. 18, below the 50th percentile of volatility expected for weeks with an FOMC meeting, according to analysis published by New York-based options manager Carrick Lane.
VIX touched a year-to-date low below 14 this month as odds of an interest-rate hike steadily climbed. Combined with the drop in VIX after inflation Friday, it’s a sign the market is getting comfortable with higher rates, said John Marshall, principal at Carrick Lane.
“It seems right now people in the equity market think FOMC is decided and care a lot more about AI,” Marshall said in a call. “Tech risks and interest-rate risks typically are related because they’re long-duration assets but maybe AI’s time is right now, profits are right now, so people aren’t pricing it as this distant future.”
It’s important to note that interest-rate volatility is not absent from markets overall. The Merrill Lynch Option Volatility Estimate (MOVE) Index, a gauge of volatility in U.S. Treasuries added 10 points last week to a 92nd percentile high, according to a note from Cboe head of derivatives market intelligence Mandy Xu.
By the same token, options pricing for volatility in rate-sensitive groups like the iShares 7-10 Year Treasury Bond ETF (IEF) and the Vanguard Real Estate Index Fund ETF (VNQ) are in the upper 90th and 80th percentiles, according to Marshall’s analysis.
Yet the volatility pricing for bonds doesn’t seem to be a factor for stocks. Odds of a hike on Wednesday’s meeting extended to above 91 percent by midday as equity prices firmed.
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