Options Traders Brace for Market Crash as Demand for Protection Surges
Options traders are signaling major concerns over a potential stock market crash, as demand for crash protection skyrocketed last week. Data from Cboe Global Markets shows a sharp increase in the purchase of deep out-of-the-money call options on the Cboe Volatility Index (VIX), Wall Street’s "fear gauge."
Options Activity Signals Investor Fear
A report from Mandy Xu at Cboe revealed that traders are aggressively buying VIX call options, which would pay off if market volatility soars. This surge in activity coincides with the worst two-week market decline since Septemberfor key indices:
- S&P 500 dropped 1.8% on Monday, shedding 104 points.
- Nasdaq Composite plunged 2.6%, losing 497 points.
- Dow Jones Industrial Average fell 1.5%, down 649 points.
The increase in VIX call buying suggests that traders expect further downside risk in the stock market, particularly with escalating economic uncertainties and new tariffs shaking investor confidence.
Big Bets on Market Volatility
On Thursday, trading volume for VIX calls with strike prices of 50 or higher reached its second-highest level on record. One trader reportedly purchased 260,000 contracts of May 55-75 strike VIX calls, spending a staggering $10.7 million to hedge against extreme market volatility.
Cboe data shows that total net buying of VIX calls spiked to nearly 250,000 contracts, marking the largest single-day demand for market crash protection since May 2023.
Tariffs and Weak Economic Data Add to Market Fears
Monday’s sell-off was intensified by multiple economic concerns, including:
- Tariffs: President Donald Trump confirmed that 25% tariffs on Canada and Mexico and an additional 10% tariff on Chinese goods would go into effect Tuesday.
- Weak Economic Data: The latest ISM Manufacturing Report showed that U.S. manufacturing contracted in February, and the Atlanta Fed’s GDPNow model forecasted a -2.8% GDP contraction for Q1 2025.
- Investor Sentiment: As economic uncertainty grows, traders are shifting toward defensive positions in case of a major downturn.
Zero-Day Options Trading Hits Record Highs
Another sign of market volatility is the surge in zero-day options trading—short-term contracts that expire the same day they are purchased. Cboe reported that trading volume in these contracts tied to the S&P 500 index reached an all-time high in February, with 56% of all S&P 500-linked contracts being zero-day options.
These contracts are often used for quick hedging and speculation, reflecting heightened uncertainty and short-term fear in the market.
What This Means for Traders
With volatility rising and traders loading up on crash protection, markets could see further turbulence in the coming weeks. While Trump’s tariff policies and economic data releases will be key triggers to watch, the demand for VIX calls and defensive options trading suggests that institutional players are preparing for potential market instability.
At Uplift Markets, we’ll continue monitoring these developments to keep you ahead of the curve. Stay tuned for more insights on how to navigate market volatility in 2025.
