Options traders bet on stock market crash, spooked by tariffs, US recession risk
Cboe's head of market intelligence said it's seeing near record bets on the VIX fear gauge spiking as traders seek crash protection.
Options traders are placing near record bets on a US recession driving a stock market crash, according to US derivatives exchange Cboe.
On March 3, Cboe's head of intelligence Mandy Xu warned it saw the second-highest volume day in history last week for options traders buying deep out-of-the money VIX Index call options to profit if the index - knowns as the fear gauge - spikes in an outcome tied to a market crash.
Overnight the market was spooked by US President Trump's pledge to push through 25% tariffs on Mexico and Canada in a move that sent the S&P/500 1.8% lower, with the tech-heavy Nasdaq losing 2.6% on worries a trade war will push the global economy into recession.
S&P/ASX 200 futures point to the market opening down 71 points or 0.86% on Tuesday, to print its fourth loss in six sessions and extend the downturn to around 4.7% since February 14.
Trading volumes spike
On Monday in the US, the VIX, known as a barometer of uncertainty, soared 16% to 22.78 in response to the gloom, and the last time it topped 50 was early August, when traders panicked over an economic crash in debt-crippled Japan.
Xu told clients the record bets on crash protection last week included one trader buying more than 260,000 strike options on the index soaring to between 55 and 75 by May for a total cost of US$10.7 million
A record 56% of the VIX bets in February were also on SPX ODTE (zero day to expiry) options that provide cover for intraday market falls, as day traders also took a bearish view on US markets that have posted back-to-back 20% returns in 2023 and 2024.
Xu added that the increased trading volume in intraday expiry options is partly linked to a deal it struck with day trading phenomenon and discount broker Robinhood.
Overnight, the pessimism around the impact of President Trump's trade barriers also pushed the Atlanta Fed's gross domestic product (GDP) tracker to show the US economy is on pace to shrink 2.8% in the March quarter, according to its latest estimates, which can be volatile.
In other moves signaling parts of the market are turning bearish, risk bellwether bitcoin tumbled 8.8% to US$86,700 as investors rotated into the safety of US government bonds.
On Tuesday morning in Australia, the risk-free benchmark US 10-year government bond offered 4.16% after the yield dropped seven basis points overnight.
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Tom covered markets as a Markets Reporter & Commentator at the Australian Financial Review for nearly five years. Prior to that he was the Managing Editor of The Motley Fool Australia leading a team of around 20 investment writers during a five-year period of massive online growth. Before that Tom worked in equities management at the Bank of New York Mellon in London and as a holder of professional investment qualification the Investment Management Certificate is eligible for membership of the CFA Society of the UK.
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Tom covered markets as a Markets Reporter & Commentator at the Australian Financial Review for nearly five years. Prior to that he was the Managing Editor of The Motley Fool Australia leading a team of around 20 investment writers during a...
Tom covered markets as a Markets Reporter & Commentator at the Australian Financial Review for nearly five years. Prior to that he was the Managing Editor of The Motley Fool Australia leading a team of around 20 investment writers during a...
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