Following a significant drop in the S&P 500 Index, traders are showing signs of confidence as they are abandoning their bets on a further steep decline. Before the index performed a strong rebound on Friday, traders were mostly getting rid of their protection hedges for the S&P 500. The cost of options safeguarding against a potential 10% decrease in the SPDR S&P 500 ETF Trust in the next three months decreased significantly, nearing its lowest level since 2023 in comparison to contracts that would benefit from a 10% increase, as per data from Bloomberg.
While there may not be complete certainty that the S&P 500 will continue its rebound from Friday, the move by options professionals to offload their downside hedges could provide reassurance for those assessing if the selling pressure has eased. After experiencing the seventh-quickest 10% decline from a record high, the S&P 500 saw a 2.1% increase on Friday.
Alon Rosin, who serves as the head of institutional equity derivatives at Oppenheimer & Co., mentioned that there might be a period of stabilization at least until the upcoming week unless circumstances change.
Traders are currently divided on the decision of whether to take advantage of the market dip. The stock market decline related to concerns over the economic repercussions of President Donald Trump's trade conflicts has prompted some to remain on the sidelines and secure profits. Conversely, individual traders remain positive and have used the decline as an opportunity to increase their exposure to stocks.
In addition, investors are looking at the VIX, commonly known as Wall Street’s fear gauge, as a potential bullish signal. Historically, heightened levels of anxiety in the market, as indicated by the Cboe Volatility Index or VIX, have been associated with improved S&P 500 performance in the ensuing month. The analysis suggests that when the VIX reaches the highest tier of volatility, the median estimated return for the S&P 500 in the following month is approximately 2.66%. This calculation is encouraging for investors considering reentry into equities.