Even as Stocks Soar, Traders Are Loading Up on Crash Protection

As a strong post-election rally drives the markets, investors are increasingly seeking protection against potential downturns in their portfolios. This trend is evident from the sharp rise in the Cboe Skew Index, which measures demand for options that guard against tail-risk events, or extreme market declines.

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Since reaching a post-election low on November 12, the Skew Index has climbed significantly, closing above 167 on Monday—its highest level in over two months, according to data. However, this uptick in demand for downside protection doesn’t necessarily signal widespread fears of an imminent market crash. Instead, it reflects a precautionary approach by investors aiming to secure their gains after a robust year in the markets, explained Danny Kirsch, head of options at Piper Sandler, in an interview.

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“Many funds have had a successful year, and they simply want to lock in those gains,” Kirsch noted. Despite the increased interest in protective strategies, he described investor sentiment heading into year-end and early 2025 as overwhelmingly bullish.

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There is reason for investor optimism in the near term. Historical trends indicate that the final weeks of the year are typically a strong period for stock-market performance. As highlighted by a Goldman Sachs strategist, the last four weeks of the calendar year often deliver some of the best returns for equities.

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Still, emerging risks have begun to temper the market’s exuberance. Over the past two weeks, several developments have raised concerns that market volatility could return, potentially disrupting the rally and casting uncertainty over early 2025.

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On the economic front, inflation data released on Wednesday showed signs of stagnation in the pace of price declines. This has fueled uncertainty about whether the Federal Reserve will move forward with another interest rate cut in December.

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Adding to the mix, President-elect Donald Trump made headlines Monday night with a post on Truth Social, where he threatened to impose tariffs on Canada, Mexico, and China immediately upon taking office in 2025. Although U.S. markets largely shrugged off the comments, the dollar surged against the Canadian and Mexican currencies, while stocks in those countries faced pressure.

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These developments served as a reminder to investors of the potential volatility that could accompany Trump’s return to the White House, despite Wall Street’s general expectation that his pro-business policies will likely boost the S&P 500.

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“There’s still demand for downside hedges, driven by factors like geopolitics, risks associated with 2025, and the Federal Open Market Committee,” said Maxwell Grinacoff, head of U.S. equity derivatives research at UBS Group.

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Grinacoff highlighted a recent increase in the skew measure, which gauges demand for bearish put options relative to bullish calls. This trend indicates that more investors are preparing for potential market turbulence.

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“There’s a confluence of concerns,” Grinacoff said. “Investors enjoyed the post-election rally, but now they’re looking three to six months ahead and trying to assess what these developments mean for the Federal Reserve and the broader economy.”

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Despite the precautionary moves, U.S. stocks have delivered strong performances recently. However, Wednesday’s trading session saw major indices retreat. The S&P 500 fell 0.3% to 6,002, snapping a seven-day winning streak. Meanwhile, the Dow Jones Industrial Average dropped 102 points, or 0.2%, to 44,753, and the Nasdaq Composite declined 120 points, or 0.6%, to 19,055.

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Nevertheless, both the S&P 500 and the Dow Jones remain on track for their best November performance in a year. The S&P 500 has gained over 5% so far this month, while the Dow has climbed more than 7%, according to Dow Jones Market Data.

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While the postelection rally has invigorated markets, the rising demand for protective strategies underscores a cautious undertone among investors. They remain optimistic about near-term prospects but are mindful of the risks that could emerge in the months ahead, from geopolitical uncertainty to shifting Federal Reserve policies.

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As 2024 comes to a close, this balance between optimism and prudence will likely shape investment strategies, ensuring that even amid market highs, investors are prepared for any surprises that 2025 may bring.

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