On Tuesday, stock bulls demonstrated resilience as the Nasdaq 100 managed a 1.5% rally into the close, despite facing potential sell-off pressures, while the S&P 500 finished just under 12 points lower. This volatility highlighted a significant divergence in market behavior, particularly in the options market.
The Cboe VIX Index, which measures volatility, ended the day lower, even after briefly spiking to 19.01, the highest level since April 28. This suggests a disconnect between the overall index and its individual components, which are experiencing substantial price fluctuations and increased options premiums.
The relatively low VIX presents a potential hedging opportunity, especially when compared to the much higher volatility in semiconductor stocks, which are currently 2.5 times more expensive. This situation attracted attention on Tuesday, as VIX options became the 10th most actively traded, with a notable preference for calls over puts.
Brent Kochuba, founder of SpotGamma, indicated in a client note that owning June VIX calls could serve as a hedge, particularly with oil prices surpassing $100. Meanwhile, major tech stocks like Qualcomm and Intel faced significant pullbacks, influenced by rising crude oil prices above $102 and a 10-year Treasury yield reaching its highest point since July.
The options flow in tech ETFs such as SMH, QQQ, and DRAM showed a shift towards less bullish sentiment, with more calls being sold than bought, although total premiums still favored calls, especially in DRAM.
In contrast, bearish sentiment was more pronounced in the bond market, where heavy call selling and put-buying occurred in the iShares long-term bond ETF (TLT), which fell by two-thirds of a percent to a near one-year low following CPI data that indicated the highest inflation reading in nearly three years.
Traders were particularly active in TLT, with over 151,000 puts purchased compared to just 97,000 sold, and less than 76,000 calls bought. One trader notably invested over $1 million in 24,000 July 81 puts, anticipating at least a 5% decline in the ETF over the next two months. Overall, the trading volume for TLT reached nearly 600,000 contracts, marking it as the 13th busiest ticker of the day