A recent report sheds light on the growing impact of institutional investors on the options market, particularly regarding volatility skew. According to the results published in the material, this trend is reshaping trading strategies and presenting new opportunities for professional traders.
Role of Institutional Investors in the Options Market
Institutional investors, including pension funds and insurance companies, are playing a pivotal role in the options market. Their hedging activities contribute to structural imbalances, which in turn lead to sustained premiums in put implied volatility. This phenomenon indicates that the demand for protective options is often driven by fear, creating a skew in the market.
Opportunities for Professional Traders
As a result, professional traders are finding high-probability opportunities to capitalize on these imbalances. When the fear premium becomes excessive, traders can strategically sell volatility, leveraging the market's reaction to institutional hedging. This dynamic not only enhances their trading strategies but also reflects the broader influence of institutional behavior on market volatility.
Dealer hedging has been identified as a crucial element affecting market volatility, as detailed in a recent publication. This contrasts with the influence of institutional investors on the options market discussed earlier. For more insights, read more.
