Wall Street Bets on "Cross Strategies" as Market Gains Volatility

Wall Street is turning to strategies that cross different asset classes to protect portfolios and capture opportunities in a market that is starting to show signs of increased tension. With stocks, gold, and oil struggling to reach new highs and Treasury bond yields rising, derivatives are once again taking center stage in investors' bets.

The phenomenon has a particularity: tension still seems contained. The implied volatility of S&P 500 options remains near low levels, while the dispersion among individual stocks has helped keep index movements subdued.

At the same time, Brent oil is trading between $100 and $110 per barrel, a range that is making traders more cautious when paying premiums for bets on large movements.

Wall Street Focuses on Derivatives

In this context, interest is growing in so-called double or "digital" binary options, which allow simultaneous betting on movements in different markets. By combining conditions, the cost of these positions can be lower than that of acquiring traditional options.

Neeraj Chaudhary from Bank of America notes that there has recently been a trend to bet against rate movements, expecting yields to fall. He also identifies predominantly bullish flows in U.S. stocks, while Europe presents a more bearish bias.

Wall Street seems to lean towards strategies that could benefit if the relationships between stocks, bonds, currencies, and commodities change again.

Among the operations that are attracting interest are bets for a higher S&P 500 along with lower rates, as well as bearish positions on European banks and the euro.

UBS has also explored this type of hedge. Its strategists Kieran Diamond and Shane Carroll proposed a trade linked to a 5% drop in the Euro Stoxx Banks index and a 3% drop in the euro against the dollar, as protection against French electoral risk.

Crossing Assets

The divergence between stocks and bonds is another focal point. The relationship between the VIX and MOVE ---which measures the volatility of the U.S. bond market--- has fallen to its lowest level in nearly two years.

Stuart Pyott from Maven Securities warns that the spike in rate volatility has not yet fully translated to stocks. "Stocks remain near highs," he explained, while demand for puts on indices continues to be moderate.

Meanwhile, Adrien Geliot from Premialab argues that volatility selling strategies remain attractive due to the difference between implied and realized volatility. According to his data, assets under management in systematic short volatility strategies reach about $92 billion.

The problem is the calendar: the U.S. midterm elections are a month away, and any political shock could quickly alter this balance. Therefore, rather than betting on a single direction, Wall Street seems to lean towards cross strategies capable of benefiting ---or limiting losses--- if the relationships between stocks, bonds, currencies, and commodities change again.

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