Author: Saqib Iqbal Ahmed
NEW YORK, Oct 17 (Reuters) – Investors in the U.S. stock options market remain restless, with a focus on U.S. Treasuries, even as tensions persist in the Middle East.
The Cboe Volatility Index rose 0.25 of a point on Tuesday to 17.46, about 3 points off the recent high of 20.78 reached on Friday.
According to data from the analytical website Trade Alert, the number of open VIX call options – derivative contracts that help investors protect themselves against rising stock market volatility – is around 11 million, close to a record.
Concerns that the conflict between Israel and Hamas could spread to the region have boosted demand for safe-haven assets such as gold and the U.S. dollar, but analysts say Treasury yields still appear to be the main driver of U.S. stocks.
Investors are mainly concerned about the Federal Reserve’s actions and its impact on stock prices despite rising geopolitical tensions, said Chris Murphy, co-head of derivatives strategy at Susquehanna Financial Group.
Wall Street’s main indexes fell on Tuesday as Treasury yields rose after data showed U.S. retail sales rose more than expected in September, suggesting the economy ended the third quarter on a strong note.
Investors fear that the strength in consumer spending could force the Fed to keep interest rates higher for longer.
US Treasury yields have risen in recent weeks to their highest levels in many years. Higher bond yields, which offer competitive risk-free returns, make stocks less attractive to investors.
“When it comes to the situation in Israel, no one really knows what it really means for global economic growth… in general, markets are quite resistant to this type of thing,” he added.
“From a VIX perspective, Israel is a bit of a sideshow,” said Tallbacken Capital CEO Michael Purves.
Stock investors will be more likely to take cues from the bond market, Purves said.
Meanwhile, the options market reflects investor uncertainty about how stocks will perform for the rest of the year.
Call activity has declined to the point where it is now slightly lower than put activity, Brian Reynolds, chief market strategist at Reynolds Strategy LLC, said in a note.
Call options give you the right to buy shares at a set price in the future, while put options give you the right to sell shares.
“The resulting lack of clarity points to greater stock market uncertainty in the near future and reinforces our desire to sell overheated equity market sectors and accumulate oversold sectors that are showing increasing momentum,” Reynolds said. (Reporting by Saqib Iqbal Ahmed; Editing by Richard Chang)
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