For skittish investors now paying up to protect against swings in U.S. stocks, JPMorgan Chase & Co. has a message: It’s time to move on.
The volatility shock that rocked markets is unlikely to violently return, making it unattractive to buy expensive options that would benefit from big gyrations in U.S. stocks, strategists led by Bram Kaplan and Marko Kolanovic say. That’s because stocks should continue to recover now that selling forced by systematic trading strategies has likely ended and underlying equity fundamentals remain strong.
The view isn’t yet encapsulated in financial markets, which are pricing near-term volatility in U.S. stocks that’s historically elevated relative to their European counterparts, U.S. Treasuries, junk bonds and gold, the team wrote in a note to clients. That’s partly a function of how the market turmoil that sent stocks into correction was largely contained in equities.
“This rich S&P 500 volatility premium should continue to normalize against other risk assets near term,” the report said. “Even if an increasingly hawkish Fed and firming inflation were to cause the market to roll over, other risky assets should be increasingly impacted, rather than this remaining an S&P 500-centric issue.”
For the analysts, trading opportunities have arisen in options where investors can sell expensive U.S. equity volatility and buy cheaper gauges of implied volatility for other asset classes.
“The U.S.-centric nature of the selloff drove a large premium for S&P 500 volatility against most other equity and cross-asset benchmarks, part of which has yet to revert,” the strategists wrote. “We recommend using the still-rich S&P 500 volatility as a funding leg for relative-value volatility trades.”
JPMorgan’s trade recommendations include:
- Buy an S&P 500 three-month 102.5 percent – 107.5 percent call spread versus selling a 94 percent put
- Buy an S&P 500 six-month 105 percent call versus selling a 95 percent put that knocks in at 75 percent (daily observation)
- Long VStoxx versus short VIX same strike/maturity calls,
- Sell an SPX March-19 1500-strike put versus long CDX 3-year protection
Although the U.S. was the presumptive epicenter of the worldwide retreat in risk assets and continues to command a sizeable volatility premium relative to other gauges, you wouldn’t know it by looking how American stocks have fared relative to their Japanese and European counterparts. Since peaking on Jan. 26, the S&P 500 Index has still outperformed the Nikkei 225 Index and Euro Stoxx 50 Index in both local currency and U.S. dollar terms.