Bearish bets rising against the markets

Short sellers are adding their positions against the SPDR S&P 500 Exchange-Traded Fund Trust, which tracks the broadest US stock index at the fastest rate in nearly a year. Other investors are trading record momentum options contracts that will pay off if the recent declines in the stock and bond markets worsen.

Rising inflation, uncertainty about the pace of Federal Reserve interest rate hikes and the threat of war in Europe have propelled financial markets to start the year. Meanwhile, earnings growth is expected to moderate from its red-hot pace in 2021, when profits were being compared with their knock-down levels during the early stages of the pandemic.

The S&P 500 is down 8.8% in 2022, while the tech-heavy Nasdaq Composite is down 13%. In the bond market, benchmark borrowing costs rose over 2% earlier this month for the first time since mid-2019.

“The sentiment is really bad,” said Danny Kirsch, head of options at Piper Sandler, who said they’ve picked more clients for hedges recently. “People are nervous.”

Short sellers added $8.6 billion to their positions against the SPDR S&P 500 ETF Trust in the four weeks beginning Thursday, according to estimates from technology and data analytics company S3 Partners. The amount will be the highest since the four-week period ending in early March 2021.

Short sellers borrow shares and sell them at low prices with a plan to repurchase and pocket the difference. Investors who short the market can outright bet that a stock will fall or reduce their exposure to a market downturn, while betting that particular stock will outperform.

Jordan Kahn, chief investment officer at ACM Funds, said his firm is reducing its position in the stock as one of its strategies while adding short positions against exchange-traded funds that track the broader market.

Mr Kahn said he became concerned at the end of 2021 when he saw individual stocks selling out, while the largest stocks outperformed major indices.

“It’s a red flag for us,” he said. “We think the most likely scenario is that large stocks that haven’t made a big correction yet will probably catch a bottom at some point.”

Investors are placing their bets against a number of big tech stocks, which have led higher in recent years in reversal positions. According to S3 Partners, investors bought Nvidia Corp. in 30 days from Thursday. It added $1.4 billion to its short position against U.S. and almost as much to its bets against Tesla Inc. In contrast, they are Bank of America Corp., Apple Inc. and is lowering its bets against Texas Instruments Inc.

Nvidia shares have fallen 20% in 2022 but are still up 58% over the past year. Tesla is down 19% this year but up 9.7% from a year ago. Both the stocks have risen since the end of 2019.

Despite the ups and downs, many traders move to buy the stock market downturn. However, traders are also exploiting other options strategies to profit from recessions or to hedge their portfolios. According to data from Cboe Global Markets, three of the most active five days for put options trading in history occurred in the first weeks of 2022.

According to Goldman Sachs Group Inc., call options on a single stock as a percentage of total option activity recently fell to the lowest level since April 2020, when the COVID-19 pandemic first broke out in the US.

For much of the past year, turbocharged bullish bets on stocks were in vogue, and many traders followed the S&P 500’s climb to a 70 new high.

Calls later give the right to buy shares by a specified date. Provides the right to sell the put.

Investors are also hedging a possible downturn in the bond market. The prospect of higher interest rates has triggered an outflow of bonds, the pace of outflows from money-market and bond funds being the biggest in at least seven years.

According to Barclays, the number of outstanding put options associated with the iShares iBoxx $ High Yield Corporate Bond ETF, ticker HYG, and the iShares iBoxx $ Investment Grade Corporate Bond ETF, or LQD, recently reached a record high. Is. PLC.

For some traders, door sentiment could be an opportunity to capitalize on any bounce.

Julian Stauff, founder of hedge-fund firm Stauff Capital in Geneva, Switzerland, said he made short-term bullish bets on stocks in January, when he saw many traders grow more pessimistic in the market. Recently, they have taken a neutral stance through the options market.

“This fear generally creates a buying opportunity,” he said.

This story has been published without modification to the text from a wire agency feed