The equities market continues to rise toward record highs while volatility has dipped to record lows. However, in a complacent market condition, more traders may be looking at the CBOE Volatility Index and related exchange traded funds to hedge a potential turn ahead.
Open interest in calls on the CBOE Volatility Index, a bearish equities trade and widely considered the best gauge of market fear, recently outnumbered puts by four to one, Bloomberg reports.
The rising interest for risk hedges as shown on open interest for calls on the VIX suggest that more people are growing wary of the extended bull market environment and are hedging their bets with VIX options in case of a sudden, precipitous turn.
Reflecting the rising complacency in the equities market, the VIX recently dipped below 9, touching a record low of 8.84, which beat the low of 8.89 from December 27, 1993, CNBC reported.
The volatility index has steadily declined to lows not seen in over two decades as U.S. equities pushed higher, triggering concerns that when market volatility strikes, the VIX will spike significantly.
“The market’s very lax,” Lee Ferridge, head of macro strategy, North America, State Street Global Markets, told CNBC. “The chance of a rate hike this year are marginally reduced. It’s positive for stocks and the VIX has declined.”