Volatility Grind-Lower Trades Gain Momentum as S&P Drops 9% and Oil Tops $100
Wall Street strategists favor “grind-lower” plays like April Euro Stoxx 50 put spreads and knock-out puts to profit from a gradual selloff. The S&P 500 is down nearly 9% from its January peak, the VIX topped 30 first since April and oil remains above $100 a barrel.
1. Strategies for a Gradual Selloff
Banks are promoting “grind-lower” volatility strategies designed to profit from a steady market decline, favoring option structures that lose value only if markets spike sharply. These trades aim for a controlled downside path rather than a sudden regime shift, reflecting current concerns over a protracted selloff.
2. Use of Knock-Out Puts and Put Spreads
April Euro Stoxx 50 index put spreads and over-the-counter knock-out puts have seen increased activity as they offer lower upfront costs versus vanilla puts. Knock-out puts expire worthless if volatility exceeds preset thresholds, creating cheaper hedges for institutional investors.
3. Market Indicators and Outlook
The S&P 500 is down nearly 9% from its January peak, the VIX has climbed above 30 for the first time since April, and oil remains above $100 a barrel. Elevated commodity prices and potential inflationary pressures heighten the risk of a deeper, more volatile selloff ahead.