Investors increasingly pour into options to hedge against extreme market swings even as US stocks continue to soar

All may not be as it seems on Wall Street, with investors increasingly looking to protective puts, volatility hedging, tail risk hedging, and other strategies to insure against the potential of market volatility and even market crashes, even as the Dow Jones, S&P 500, and Nasdaq all hit multiple all-time records in quick succession this month amid a post-election market rally.

To say that US markets are bullish would be an understatement, with the S&P 500 up 3.7% since the election on 5 November, the Nasdaq is up 3.8% over the same period, and the Dow Jones is leading the pack up by 5.9%. Some big name and established companies have also seen their share prices rise more in just the last few weeks than many do over several years, with Axon Enterprise seeing its share price an impressive 44.0%, Tesla stocks up 37.1%, and Vistra Corp witnessing a 26.8% rise in the price of its stocks.

But some traders are preparing for the possibility that the good times could come to an abrupt end sooner than expected, as trackers that gauge the uptake of protection measures against market volatility picked up in the second half of this month. The Nations TailDex Index — which measures the market’s expectations of a potential dramatic drop in equity prices — initially reacted well to Trump’s electoral victory, but is now noting a souring of the mood among investors, having picked up 28.2% since 14 November. It’s a similar story for the Cboe Skew Index — which measures the perception of tail risk in S&P 500 investment returns in the next 30 days — with the gauge picking up 19.7% since 12 November after a brief post-election respite and now sitting firmly in high-risk territory.

Caution, more than panic, is what is driving the buys, RBC Capital Markets’ Amy Wu Silverman told Reuters, as investors are more likely being cautious in the face of the likelihood of an uptick in US inflation and unpredictable trade disruptions from Trump’s proposed draconian tariffs — as opposed to a full-fledged market crash. “While investors broadly remain long equities, the tails are fatter … this is partly from a rise in geopolitical risk premium and certainly potential policy risk as Trump returns to the presidency and potentially enacts tariffs and other measures," she explained. Susquehanna’s Chris Murphy, agrees, explaining that “the general idea is there is an 80-95% chance of pretty low volatility … but there’s just more of a tail event being factored in.”

MARKETS THIS MORNING-

Asian markets are mixed in early trading this morning, with Japan’s Nikkei leading in the green at +0.5% and Korea’s Kospi at +0.3%, while China’s Shanghai index is edging into the red at -0.1% and Hong Kong’s Hang Seng is down 0.5%.

THE CLOSING BELL-

The EGX30 fell 1.5% at yesterday’s close on turnover of EGP 2.8 bn (33.4% below the 90-day average). Egyptians investors were the sole net buyers. The index is up 19.9% YTD.

In the green: Oriental Weavers (+3.0%), Orascom Construction (+0.5%), and Elsewedy Electric (+0.2%).

In the red: Ezz Steel (-4.9%), Emaar Misr (-2.9%), and Alexandria Containers and Cargo Handling (-2.8%).