Portfolio puts are now in high demand even though markets were within striking distance of all time highs in the last few weeks. This preparation for a downturn can be viewed as a bullish contrarian indicator.
Truth be told, the masses are not often right. When the consensus opinion is heavily one sided or bearish in this case, history has shown the market typically moves in the opposite direction.
The option skew has out of the money puts more expensive in relative terms than the corresponding calls. All things being equal, the puts and calls from the current market should be priced the same.
The increased demand is most likely more than just individuals forecasting a downturn in stocks. Stock index puts have been inflated with unusual option activity in far, far away strikes some below the financial crisis lows.
One contributor to this new found interest may be government stress tests of financial institutions to evaluate their readiness for volatility. Banks buy puts to put in a price floor for dollar exposure. The limited duration hedges wallpaper over the unlimited risk in long term portfolios.
It is not often that market participants are adequately prepared for a corrective course. In an ideal world, investors should control and quantify risk to limit downside losses.
Risk exposure is something that can minimized with typically very reasonable insurance.
This record level of readiness from the skew suggests sunshine is ahead.
