VIX Calls a “Perfect Hedge” for Tomorrow

Stocks climbed today, bolstered by a better-than-expected GDP print as earnings season continued. The Dow saw an uptick of 85 points, translating to a 0.2% increase. The S&P gained as well, rising by 17 points or 0.4%, while the Nasdaq Composite climbed by 45 points, marking a 0.3% increase.

Today’s economic data revealed that the US economy grew more rapidly than anticipated in the fourth quarter. Real gross domestic product (GDP) expanded at an annual rate of 3.3% in the last quarter of the year, a slowdown from the 4.9% growth in the third quarter but significantly higher than the 2.0% growth expected. This robust economic activity, although showing signs of returning to a pre-pandemic pace, has been a welcome sign of a potential ‘soft landing.’ But the recent rally has almost entirely been driven by rate cut hopes, which dwindle every time strong economic data is released. Today’s GDP print could certainly delay rate cuts, which could end up hurting bulls with the S&P at its all-time high.

Earnings were mixed again today as Humana’s stock saw a significant drop of 11%, driven by the health insurer’s warning about a drastic rise in medical costs impacting this year’s earnings and affecting its 2025 profit targets. On the brighter side, American Airlines’ stock ascended over 6%, exceeding expectations with its full-year adjusted earnings per share forecast, backed by strong passenger booking trends and declining fuel prices. Post-market closing, companies like Intel, T-Mobile, and Western Digital are set to announce their quarterly results.

Tesla’s stock declined by 9% following CEO Elon Musk’s caution about notably lower sales growth in 2024 compared to the previous year, amid increasing competition, especially from Chinese counterparts. Boeing also experienced a 4% stock decrease after the US aviation regulator decided to restrict the company’s production expansion of its 737 MAX jet, following a recent mid-air incident involving the MAX 9 model.

Contrastingly, IBM’s stock rose by over 9% after forecasting full-year revenue growth that surpassed expectations, driven by steady demand for its IT software and consultancy services, particularly in artificial intelligence adoption.

In the commodities market, oil prices witnessed a boost, with US crude futures increasing by 1.8% to $76.45 a barrel, and the Brent contract rising by 1.6% to $81.33 a barrel. This surge was influenced by today’s GDP data and a substantial decrease in US crude inventories last week despite the impact of severe winter weather on refineries and road travel. US crude production also experienced a dip from a record high to a five-month low.

Furthermore, the People’s Bank of China’s recent unexpected move to cut reserve requirements for local banks, aiming to stimulate economic growth, also played a role in today’s oil rally. China is reportedly eyeing a $282 billion stimulus package to help buoy its plummeting stock market. If Beijing decides to fire the ‘stimmy bazooka,’ Chinese stocks and oil prices would simultaneously erupt higher. That bodes well for energy stocks, many of which are now trading near key support at their late December lows.

Tomorrow’s Personal Consumption Expenditures (PCE) index release should shake things up, too. With market volatility still extremely low (as seen in the VIX) and the potential for a massive move tomorrow (either up or down), the VIX could be set to surge. And that’s even if there’s a rally. The VIX measures volatility on S&P options, and right now, the S&P’s implied volatility (IV) percentile is just 17%. A 50% reading would indicate IV that’s in line with the 52-week average.

In other words, there’s major potential for a burst in IV tomorrow morning after the PCE deflator is released, as it’s the Fed’s favorite inflation gauge. That makes VIX call options – which rise in value as volatility rises – an attractive hedge for bulls and bears alike whether the PCE comes in hotter or cooler than expected.


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