Heavily Hedged Traders Have Been Awaiting a Stock-Market Storm…
They’ve been steadily boosting bets against equities, shaking off a reluctance to short tracing to last year’s meme stock upheaval. Bearish bets on the largest exchange-traded fund tracking the S&P 500 have surged, while put open interest on bond-focused products has risen to historic levels. Meanwhile, professional managers have been hedging their credit exposures.
The process, undertaken when the Fed started to indicate it was serious about taming inflation, is starting to look fortuitous with tension building around Russia and Ukraine. Equity markets proved resilient overnight, shaking off a decline in futures that at one point reached nearly 3% on the Nasdaq 100 Index.
Investors are wagering that the recent pain in markets will intensify.
Stocks dropped sharply in another wild session Tuesday after Russia deployed troops into two breakaway areas of Ukraine, escalating tensions in the region. The S&P 500 ended the day down 1%, extending the losses from its January record to more than 10% and meeting the criteria of a market correction. The index hadn’t suffered a similar decline since February 2020.
Short sellers have been adding to their positions against the SPDR S&P 500 Exchange-Traded Fund Trust, which tracks the broad U.S. stock index, at the fastest rate in nearly a year. Other investors are scooping up at record pace options contracts that would pay out if the recent declines in the stock and bond markets worsen.
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