(Bloomberg) -- Volatility has fallen through the floor, and traders are enjoying it.
The VIX index briefly slid below 13 points on Wednesday, its lowest level since July. Investors still unwinding left-over US election hedges while also chasing exposure into the year-end have led to a surge in options selling and a suppression of market swings.
Systematically shorting S&P 500 Index puts and strangles each day is back to being more attractive than simply buying stocks, Nomura cross-asset strategist Charlie McElligott wrote in a note. The Sharpe ratio, a measure of risk return, has risen to about 19 points for those options strategies, compared with 15 points for holding shares, he added.
The assets under management for so-called derivative-income funds have jumped to about $260 billion, compared with $95 billion for exchange-traded funds with embedded options-selling strategies, according to Nomura. As a knock-on effect, realized volatility has slumped, leading to funds that use it for risk-taking to further increase exposure and support the market with a steady flow of stock buying.
Meanwhile, options dealers remain long gamma, with an estimate of $10 billion per 1% move in the S&P 500 Index, Goldman Sachs Group Inc. estimated in a note. That’s acting as an added market buffer for any weakness, as dealers buy on drops to rebalance positions.
“The volatility market is now a player on the field, the quarterback, not the coach on the sideline,” Goldman Sachs tactical specialist Scott Rubner said, noting that the S&P 500’s two-week realized volatility “fell out of the bottom on my five-year chart.”
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