S&P 500 Put Options Were Bought in Record Numbers as Markets Plunged on Monday

On Monday, traders set a record for the number of options betting on a decline in equities, highlighting the high level of anxiety among investors as stock markets plummeted.

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According to data from S&P Dow Jones Indices, a staggering 3.3 million S&P 500 put options were traded during the first session of the week, coinciding with a 3% drop in the benchmark index. This surpassed the previous daily record for S&P 500 put options, which was just under 3 million.

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Put options represent a bet that the price of an underlying asset will decrease. They can be used to hedge a long portfolio or to speculate on a market downturn.

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The rush to buy put options was driven by multiple fears: potential U.S. recession, concerns that major tech stocks associated with artificial intelligence were overvalued, and the risk of forced selling by funds that were wrong-footed by a sudden sharp rally in the Japanese yen.

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Despite the increasing cost of put options, reflecting a more expensive volatility component of their price, investors continued to scramble for protection. Benedek Vörös, director of index investment strategy at S&P Dow Jones Indices, noted that "despite our caution yesterday that the high VIX indicates insurance is relatively expensive, many market participants appear to be purchasing protection nonetheless."

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The heightened demand for S&P 500 options caused the Cboe Volatility Index (VIX) to spike sharply on Monday. The VIX, an indicator derived from options that measures expected S&P 500 volatility, briefly exceeded 65, its highest level since March 2020 at the onset of the COVID-19 pandemic.

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Monday's trading activity underscored the extreme caution and unease among investors. The record-setting number of put options reflects their strategy to safeguard against potential losses in an uncertain market environment. This behavior was evident even though the cost of securing such protection had risen due to increased market volatility.

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This surge in put option purchases happened in the context of several key concerns. Investors were worried about the possibility of a U.S. recession, fueled by a series of disappointing economic indicators. Additionally, there were fears that the high valuations of tech stocks linked to AI, which had driven significant gains earlier in the year, might not be sustainable. Moreover, a sudden appreciation of the Japanese yen created concerns about forced selling by funds that were caught off guard.

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The rapid increase in the price of put options, driven by the more expensive volatility component, did not deter investors from seeking protection. Vörös highlighted this trend, pointing out that the high VIX suggested that the cost of insurance was relatively steep, yet market participants continued to buy it.

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The Cboe Volatility Index, a key measure of market expectations for volatility, surged in response to the spike in demand for S&P 500 options. The VIX briefly rose above 65, marking its highest point since the early days of the COVID-19 pandemic. This sharp increase in the VIX reflected the heightened anxiety and uncertainty that gripped the market.

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In summary, the record-setting number of put options traded on Monday illustrates the deep-seated anxiety among investors. Despite the higher costs associated with increased volatility, the surge in put option purchases indicates a strong desire to hedge against potential market declines. This behavior is driven by concerns over a potential U.S. recession, high valuations of AI-related tech stocks, and the impact of a stronger Japanese yen. The significant rise in the VIX further underscores the elevated level of market volatility and investor apprehension.

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