Analysis-Stock-hungry volatility funds, ‘gamma-heavy' options dealers could buoy US equities

investing.com:

By Saqib Iqbal Ahmed

NEW YORK (Reuters) — An epic rally in U.S. stocks has sent Wall Street's fear gauge to a post-pandemic low. Options strategists believe market gyrations may stay subdued for some time — potentially smoothing the way for further gains in equities.

The Cboe Volatility Index, which measures investor demand for protection against stock swings, is hovering just above that low of 12.45 hit late last month, in contrast with a long-term average level of about 20.

The move occurred as expectations that the Federal Reserve is done cutting interest rates fueled a rebound in the S&P 500, taking the index to a new closing high for the year. The S&P 500 is up 19% year-to-date, following a 9% gain in November — its best monthly performance since July 2022.

A 0.5% decline in the S&P 500 on Monday took the VIX to 13.08.

Since the VIX tends to move inversely to stocks, market participants watch it closely as an indicator of investor sentiment and positioning. With momentum firmly on the side of the bulls and investors' risk appetite high, options mavens say volatility is likely to remain subdued for the remainder of the year.

«Volatility has really collapsed,» said Ilya Feygin, consultant to institutional execution services firm WallachBeth Capital. Feygin believes volatility is likely to remain suppressed until at least to year-end.

Among the factors closely watched by market participants are the funds that take their signals from market volatility, selling when volatility picks up and buying when it subsides. As market gyrations have calmed, these volatility-targeting funds have become buyers of U.S. equities, sucking up some $30 billion worth of purchases in the week ended Nov. 30, according to data from Nomura