Fed Spurring Hedges In U.S. Stocks as Call Index Drops: Options

By Inyoung Hwang

(Bloomberg) — As the bull market in U.S. equities enters its seventh year, options traders are loading up on contracts to protect against losses if the rally loses steam.

The ISE Sentiment Index, which tracks the number of calls traded relative to puts, touched the lowest level since June 2013 last week after a surge in hiring fueled speculation the Federal Reserve will raise borrowing costs this year.

U.S. stocks are the third-worst performing developed market this year amid mounting concern that the period of near-zero interest rates that helped the Standard & Poor?s 500 Index triple is close to ending. The plunge in the ISE gauge signals institutional investors and hedge funds may be on the sidelines as they wait for the first rate increase since 2006, according to Ioan Smith of KCG Europe Ltd. in London.

?They may be hedging ahead of the possible beginning of a rate hike cycle,? said Smith, trader and managing director at KCG. ?The indicators I use have flagged up potential caution from the investor base.?

Employers added 295,000 workers to payrolls last month, and the unemployment rate dropped to 5.5 percent, a level the Fed considers full employment. That puts the central bank on course to raise interest rates as soon as June.

The S&P 500 sank after the report on March 6 and posted a weekly loss. Three rounds of Fed bond-buying and low interest rates have helped lift the U.S. benchmark more than 200 percent from its low on March 9, 2009. The index lost 1 percent to 2,059.12 at 10 a.m. in New York.

Hedge funds grew bearish on U.S. stocks even before the payrolls report. Speculators turned net short on S&P 500 futures in the week ended March 3 for the first time since November, according to data from the Commodity Futures Trading Commission.

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