NEW YORK (Reuters) - Concerns over U.S. President Donald Trump’s ability to deliver on promised healthcare reform, tax cuts and other measures aimed at promoting economic growth dealt U.S. stocks their worst shock in months this week, but options traders are not rushing to protect themselves.
Signs the Trump Administration's push to win enough votes in the U.S. House of Representatives dismantle former President Barack Obama's Affordable Care Act tugged the benchmark U.S. S&P 500 stock index down more than 1 percent on Tuesday .SPX.
The increasingly fleeting nature of recent volatility spikes, however, has made hedging with options an expensive affair and it would take more than a one-day shock for investors to shake off their hedging fatigue, options market experts said.
Tuesday's slide may have spurred some investors to reach toward safe-haven assets like gold XAU= and the Japanese yen JPY=, but there was no rush to load up on options-based hedges.
“It’s conditioning. Investors over the last several years have been conditioned to believe that volatility is broadly suppressed and if you get a little pullback it’s going to be bought very quickly, and before you know it you’ll be at new highs,” MKM Partners derivatives strategist Jim Strugger said.
The S&P 500 has already recovered about half the ground lost on Tuesday and was up 0.1 percent on Thursday.
But any hint of further trouble for Trump’s agenda, especially his proposed tax cut, could precipitate a stock market correction, investors warn.
Still, traders in the options market are not quite ready to rush to buy protection.
“We haven’t seen a lot of big prints of people buying puts and put spreads, that we usually start to see when we get a big move down. We don’t see a lot of signs of panic,” said Alex Kosoglyadov, director of equity derivatives at BMO Capital Markets in New York.
Put options convey the right to sell shares at a fixed price in the future and are often used to protect against market declines. Calls, which convey the right to buy shares in the future, are usually used for bullish bets.
While overall equity options activity leaned toward puts slightly on Tuesday, traders have since resumed loading up on calls.
On Thursday, 4.1 million call options had traded by 1:00 p.m. ET (1700 UTC), compared with 4 million puts.
In the recent past, investors who spent money on options positions to protect against stock swings have seen their hedges go unutilized even as the cost of buying protection has eaten into return on investments.
“If you are a hedge fund and grandma has outperformed you for the last seven years because she has not spent anything on hedging, you have to finally make a decision on maybe taking the cue from grandma,” Strugger said.
Reporting by Saqib Iqbal Ahmed; Editing by Daniel Bases and Dan Grebler