With the US stock market at a record high and daily stock gyrations near multi-decade lows, some investors have raised concerns about the lack of fear in the market, but US equity options market data suggests investors are far from complacent.

Positioning in options on S&P 500 index and CBOE Volatility Index shows investors have been gradually adding to hedges over the last few months.

“We didn't see it on our desk and no one seems to care much about hedging but somehow it's happening,” said Jim Strugger, derivatives strategist MKM Partners in New York.

“It's sort of under the surface, more like stealth hedging," he said.

The S&P 500 index has climbed 16 per cent this year and is on pace for its eighth straight month of gains, the longest such streak since just before the 2007-2009 financial crisis.

The CBOE Volatility Index, better known as the VIX and the most widely followed barometer of expected near-term stock market volatility, closed at a record low earlier this month.

Some investors warn that heightened reliance on strategies that profit from continued calm in stocks, and months of frustration over hedges that have gone to waste while the market powered on, have left the market extremely vulnerable to a shock.

Boom-time complacency should top the worry list for investors, according to participants in the recent Reuters Global Investment 2018 Outlook Summit in New York.

The options market, however, suggests that investors are not as vulnerable to a sell-off in stocks as the anemic level of the VIX would suggest, analysts said.

For instance, for the S&P 500 index options, there are 2.1 puts open for each open call contract, close to the most defensive this measure has been over the last five years, according to options analytics firm Trade Alert data.

An index call option gives the holder the right to buy the value of an underlying index at a fixed level in the future. A put conveys the opposite right and is usually used to protect against declines in the index.

While some of put activity may be due to investors selling puts to generate income, brisk put volume suggests renewed interest in protective positions, analysts said.

“More often than not, even in the world we live in where volatility is so attractive to sell, you can make a fair assumption that people are buying options,” said MKM's Strugger.

VIX options also show similarly elevated positioning in out-of-the-money VIX calls - contracts that are not profitable yet would reap gains if volatility spikes.

“When open interest on VIX out-of-the-money calls is really high, I would tend to think that the market is more aggressively hedged,” said Aashish Vyas, director of portfolio strategy at Durango, Colorado-based Swan Global Investments.

“To me, that matters more than the absolute level of the VIX,” he said.

Positioning in options on SPDR S&P 500, iShares Russell 2000, the PowerShares QQQ Trust also show healthy defensive positioning.

While the data does not suggest that the market is gearing up for an immediate crash, as would be suggested if the VIX were to shoot up, it does imply that investors would not be taken by surprise if volatility starts to trend up in coming months.

“I don't think the market is complacent,” said Joe Tigay, chief trading officer at Equity Armor Investments in Chicago.

“People have downside protection,” he said.

A recent blog post by New York Federal Reserve researchers showed that even as the overall level of volatility priced into options of varying tenure has dropped, investors are still pricing in a lot more volatility in longer dated options than in near-term contracts.

That is a departure from the pre-crisis period when investors demanded relatively similar returns for taking on one-year and one-month volatility risk, essentially betting that the state of calm would persist into the future, the researchers said.

They added that the shift in the pricing of risk, despite the low level of the VIX, showed that investors may not be so complacent after all.

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