Optimism in Stock Markets Coexists with Long-Term Risks
As geopolitical tensions in the Middle East eased, U.S. stocks reached a record high last week, energy futures prices fell, and market sentiment generally turned optimistic. Short-term bullish sentiment increased, and put option premiums continued to narrow. However, the long-term skew in the options market remains stable, indicating that investors remain cautious about future risks.
The price of long-term futures on the Chicago Board Options Exchange Volatility Index (VIX) remains high, reflecting investor concerns about the potential economic shocks from tariffs. Rocky Fishman, founder of Asym 500 LLC, noted that although the market has superficially returned to calm, the derivatives market has not returned to February levels, and April’s significant volatility left lasting effects. The VIX futures curve is steep, within a range rarely seen in the past two years.
Divergence Between Oil and Stock Market Trends
Although Middle East tensions have eased, the oil market has not fully recovered from the impact of the Israeli-Palestinian conflict. Brent crude implied volatility has fallen to early June levels, with skew remaining balanced, indicating no clear market tilt towards bullish or bearish. However, compared to the stock market, the volatility premium for oil options remains high.
JPMorgan's derivatives strategy team suggests considering a mixed "stocks + oil" trading strategy, noting that if Middle East tensions rise again, oil prices may increase, while a high-interest rate environment could pressure the stock market. They emphasize that although the correlation between recent oil prices and the stock market has risen, it often turns negative during geopolitical tensions, creating a hedging effect.
Investors Quickly Rebalance to Cope with Potential Changes
According to data from the ICE, hedge funds and large institutional investors sharply reduced their net long positions in Brent crude futures and options in the week ending June 24, marking the largest weekly reduction since April and reflecting cooling market expectations of geopolitical risks. Previously, the market had just established the largest bullish position in 11 weeks, highlighting the rapid shift in market sentiment.
Not only the oil market, but in the European gas futures market, commodity trading advisors (CTAs) last week quickly shifted positions from 9% net long to 18% short, with trend-following algorithms exacerbating price volatility, increasing hedging costs and trading difficulties.
Bridgewater Research Group pointed out that this rapid rebalancing often makes it more challenging for companies with actual positions to operate stably, putting the already fragile market liquidity to the test.
Oil Options Calendar Spread Trading Rises
Notably, open interest in oil options calendar spread trading hit a record high this month, reflecting investor bets on a shift from short-term supply tightness to oversupply expectations. As OPEC and other oil-producing nations push forward with plans to increase production, and global demand may weaken due to uncertain economic prospects, the "hockey stick" structure that disappeared due to geopolitical conflicts has returned to its pre-conflict state.
Goldman Sachs analysts pointed out that the rapid decline in geopolitical risk premiums reflects market reactions to Iran's restrained response and undisturbed supply, while predicting a potential global inventory buildup in autumn affecting the oil market structure.
Markets Must Remain Vigilant Against "Risk Surprises"
Despite short-term upbeat sentiment driving stocks higher, traders are utilizing the derivatives market to prepare for potential macro and geopolitical risks. The Chicago Board Options Exchange VVIX recently fell to its lowest level since last July, prompting market purchases of VIX call options, suggesting some investors are concerned about a possible reversal in market sentiment.
In the context of high global interest rates, volatile trade policy, and unexpected geopolitical events, traders need to be wary of "black swan" events causing volatility shocks, ensuring proper risk prevention and asset allocation to navigate potential market turmoil smoothly.
