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Headlines
- After a volatile week for the S&P 500 Index, traders are hesitant to fully re-engage with stocks.
- Risk reversals and call spreads are becoming more popular as cost-effective strategies to navigate market directions.
- Market volatility is expected to remain high, influenced by upcoming economic reports and events.
After one of the wildest weeks in recent market history — where the S&P 500 Index experienced both its biggest one-day slump and best rebound since 2022 — traders are understandably hesitant to fully commit to stocks again. Many are now exploring alternative strategies.
Risk reversals and call spreads, strategies involving the purchase of one contract while selling another, are increasingly appealing for those with a positive outlook on the market. Recent data from Bloomberg indicates that calls on the S&P 500 Index have been at their cheapest in years relative to puts.
Last week saw a spike in options prices, with the Cboe Volatility Index reaching an almost four-year high due to concerns over weak economic data. Despite a slight decrease, implied volatility remains significantly above the range from the past 16 months. This has made put options more expensive, providing an incentive to sell them to fund bets on a market rally. According to Christopher Jacobson, co-head of derivative strategy at Susquehanna International Group, options can be a valuable tool for traders who anticipate further financial stock losses but want to avoid missing out on potential gains.
In a bullish risk reversal, traders buy a call and sell a put, while a call spread involves trading just calls. Although these strategies offer limited rewards, their lower cost and reduced risk exposure make them attractive. Ratio spreads, where one side of the trade involves more contracts than the other, are even cheaper but come with a reduced reward and potential loss if prices spike.
Some traders are combining both strategies. For instance, an investor in the VanEck Semiconductor exchange-traded fund recently bought December $255/$290 call spreads while selling $160 puts. Citigroup Inc. noted in a Sunday report that call spreads on the fund are well-priced for those interested in a rebound in artificial intelligence stocks.
US stock volatility has increased after months of calm, which had taken the VIX to its lowest average reading since 2017 in the first half of the year. In July, high prices for bullish options on some megacap tech stocks allowed traders to hedge by buying longer-dated puts and selling calls.
Market watchers expect volatility to remain elevated in the near term due to several upcoming events, including a key US inflation report on August 14, Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole symposium on August 23, and Nvidia Corp. earnings on August 28. Rocky Fishman, founder of derivatives analytical firm Asym 500, suggests that two- to three-week call options could be a prudent way to gain exposure to a rebound, aligning well with the strategy of selling puts to buy calls.
