Although many investors still believe the new government will be Bullish for USA companies, some investors are protecting their stock portfolios from the impact of "volatility spikes" through the derivatives market. This hedge against low probability but high impact shocks (known as "tail risk") highlights the market's unease with Trump's unpredictability in trade and economic policies.

Currently, the volatility Indicators on Wall Street remain low, and the stock market has seen a slight increase since last year.

Mandy Xu, the director of derivatives market intelligence at Cboe Global Markets, stated, "If you are a Fund manager, would you adjust your entire portfolio because of a news headline? You cannot, because you do not know if this headline will persist. So what do you do? You use Options." She was referring to tools that give holders the right to buy or sell Stocks at predetermined prices.

Xu added, "People are feeling nervous and are seeking hedges against tail risk."

Maxwell Grinacoff, head of USA stock derivatives research at UBS Group, stated that if the VIX Index, which measures short-term volatility of American Stocks (often referred to as Wall Street's "fear gauge") spikes, the buying volume of related Options will "surge."

Cboe data reveals that despite the VIX Index itself being far below its long-term average, the rush to buy these Options has pushed their prices close to historical highs.

Xu indicated that if the Blue Chip S&P 500 Index (which has risen about 3% since the end of 2024) were to fall sharply, the demand for related Options would also increase significantly.

Analyst Rocky Fishman from the research institution Asym 500 stated: "The volatility situation can change rapidly, making it harder for investors to wait to increase protection after a sell-off begins; therefore, even when the market is strong and standard volatility indicators are low, the prices of tail risk hedging strategies remain elevated."

Xu stated that the demand for Options that pay out when the S&P 500 Index declines mainly comes from retail investors. Institutional investors, including hedge funds, retirement funds, and asset management firms, tend to prefer buying VIX Call Options.

However, retail investors are also flocking to higher-risk short-term derivatives, which could become worthless if the Target Price is not realized quickly. On January 31, when Trump threatened to impose tariffs on some of the USA's largest trading partners, the trading volume of "zero-day" contracts linked to the S&P 500 Index reached a record 2.4 million.

Charlie McElligott, a derivatives strategist at Nomura, stated that the recent weeks' demand from retail investors has been very strong, reminiscent of the meme stock frenzy during the COVID-19 pandemic.

Editor/lambor