Amy Wu Silverman, Head of Derivatives Strategy, RBC Capital Markets, reports that it’s been a tumultuous year so far with many different cohorts thinking about what’s going on in the market.
A bearish lean has replaced the five alarm fire post Liberation Day panic, she says.
Her clients include hedge funds, pension funds and her role is to help them discuss the risk in their portfolios, helping them hedge against volatility.
Options are binary, she says, but she feels that firms have been quite successful with their hedging.
“The equity skew was elevated at the beginning of the year which was monetised quite well,” she says. “People are waiting and hoping for more clarity before they spend their premium. VIX call options will have allowed you to benefit from the rise in volatility.”
Wu Silverman says that investors believed that President Trump would manage the stockmarket to some extent, before the election, but have now realised they are wrong.
“There is still a put on Trump, as it were, but the strike was a little lower than we thought and we have realised it’s in the whole market, not just the stockmarket. People are asking: ‘Is there a risk for a potential freefall?’ and ‘Who is going to blink first?’ which is the big question mark.
“A huge tail event would be if the tariffs stick such as the 145 per cent tariff between China and the US. The market is saying this is untenable.”
Wu Silverman says that her clients like to use the SDEX and the TDEX to track the costs of a drawdown on the market.
“The way I interpret this is that the market is saying we won’t get to a world where we have 145 per cent tariffs with China. Things will be OK. The question from investors is if we actually get this world where there are tariffs of 145 per cent, then the cost of the tail projections are too low and they are underpriced so then we would be in recessionary territory.”
Wu Silverman also advises on ETF options as hedges for her clients, noting that SPY and QQQ are two of the most liquid ETFs on the planet.
“The general is that clients are using to ETFs to hedge, using broad based SPY and QQQ, but we have also seen a lot of interest in the IWM and, sector wise, the XRT which shows how the consumer will react.
“The most active fixed income ETFs such as HYG and TLT is where we see options are being used because of the ongoing tumultuousness in the rate space. A lot of people are using HYG puts as a longer-term recession hedge with concern for the possibility of a recession and how that would impact on the underlying companies.”
