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Investors are increasingly employing tactics to shield their stock portfolios from sudden “volatility spikes.” This trend highlights the unease surrounding U.S. President Donald Trump’s policies, even though stocks have enjoyed a positive start to the year.
Many investors are turning to derivatives markets for protection against significant fluctuations in U.S. equities. This is happening even as Wall Street’s volatility measures remain calm, and stocks have seen modest gains since last year.
This shift towards hedging against low-probability, high-impact events—referred to as “tail risks”—shows how Trump’s unpredictable trade and economic strategies have left investors feeling uneasy. This is the case even though many are wagering that his administration will benefit corporate America.
“If you’re managing money, do you overhaul your entire investment strategy based on a single headline? You can’t, because there’s no guarantee the story will hold. So what’s your move? You turn to options,” explained Mandy Xu, who leads derivatives market intelligence at Cboe Global Markets. Options are financial instruments allowing holders the potential to buy or sell stocks at pre-established prices.
“Investors are unsettled and grabbing for tail hedges,” Xu added.
Maxwell Grinacoff, leading the U.S. equity derivatives research at UBS, noted a “rampant” surge in purchasing options that would benefit if the Vix index—Wall Street’s “fear gauge” of short-term volatility—were to spike. This rush has driven up option prices to near historic levels, even while the Vix remains below its long-term norm, as evidenced by Cboe data.
Xu also noted that there has been a boom in demand for options that would become profitable should the S&P 500, which has gained about 3% since the end of 2024, plummet.
“The possibility of swift changes in volatility makes it tougher for investors to hold off until a market drop occurs before seeking protection, resulting in consistently high tail hedge prices, even when the markets are robust and typical volatility indicators are low,” said Rocky Fishman, a derivatives expert at the research firm Asym 500.
Xu highlighted that most of the demand for options cashing in on an S&P 500 downturn stems from retail investors. In contrast, institutional investors like hedge funds, pension funds, and asset managers have shown a preference for Vix calls.
Retail investors are diving into riskier short-term derivatives, which lose value if target prices aren’t swiftly met. On January 31, a record-breaking 2.4 million “zero-day” contracts linked to the S&P 500 were traded after Trump’s tariff threats against major U.S. trading partners.
The retail drive has been “tectonic” lately, echoing the intense activity seen during the Covid-era meme-stock craze, noted Charlie McElligott, a derivatives strategist at Nomura.
