In This Article:
(Bloomberg) -- As April’s volatility storm fades into memory, traders are left balancing calmer markets and the ever-present risk of a fresh round of headline shocks.
Most Read from Bloomberg
-
A New Central Park Amenity, Tailored to Its East Harlem Neighbors
-
As Trump Reshapes Housing Policy, Renters Face Rollback of Rights
-
Is Trump’s Plan to Reopen the Notorious Alcatraz Prison Realistic?
-
What’s Behind the Rise in Serious Injuries on New York City’s Streets?
-
NYC Warns of 17% Drop in Foreign Tourists Due to Trump Policies
A consensus had developed among derivatives strategists heading into 2025: While regular option selling by income ETFs and other funds would keep volatility broadly in check, there would be more short-term shocks like Aug. 5. Following the April 2 tariff selloff that sent the Cboe Volatility Index spiking before a reversal, that view looks prescient so far.
The question for investors of how best to hedge may boil down to which Greek word they prefer at the moment: gamma or vega. Oversimplified, that’s the difference between owning short-term options that benefit from brief periods of large intraday moves, or longer-term contracts that gain value during seismic shifts in the market.
While in April short-term options were the big winners, the big intraday and close-to-close gyrations may not repeat if stocks slide back to last month’s lows. That has strategists pointing again to longer-dated contracts — a popular trade heading into the April 2 tariff shock — expecting that the current rally that has erased all of the early April losses will run out of steam.
“While we can’t entirely rule out a sudden equity market shock, we expect a more gradual repricing driven by weaker forward guidance — in essence, a low-volatility bear market,” said Antoine Bracq, head of advisory at Lighthouse Canton.
Future tariff announcements may have a diminishing impact on volatility, especially as Trump has shown the propensity to re-align himself with financial markets within days, particularly if the bond market is sending signals. So market participants are looking for ways to play equity downside while staying short or neutral volatility.
With the market one trade headline away from a sharp reversal, hedges need to be actively managed to cash in a winning position quickly before conditions change. That adds a further complication.
“Theoretically, the most effective hedge would be to short futures, but the challenge lies in knowing precisely when to lift it,” said Bracq. “Because of this, we see a more practical approach in exploiting the current levels of implied volatility (with the VIX now back around 22) by buying a December 2025 100%-80% put spread.”