Last Friday, U.S. stocks closed with the worst weekly performance since June, but a group of the most senior options analysts unanimously believed that the reaction in the options market was unusually calm.

The Chicago Board Options Exchange Volatility Index (CBOE Volatility Index, VIX) is often referred to as the so-called “fear index.” On Friday last week, the index briefly reached its highest level since April, but then quickly fell back to close at 19.4. Despite the S&P 500 index closing down nearly 2% on that day, the CBOE Volatility Index saw a decline. According to its analysis of 126 selling episodes since 2018, the CBOE Volatility Index should have risen by more than 2.6 points, indicating that a rise of only 2.2 points was “relatively mild” for such a significant decline in the stock market.

Even in the Nasdaq 100 index – where the implied volatilities of most option contracts have increased – there are some key exceptions. According to data shared by Nasdaq Kevin Davitt, after the sell-off on October 16th, the prices of put options with strike prices 20% to 50% below the current price had higher volatilities.

This means that traders not only did not flood into the S&P 500 index options market last Friday, but they were also particularly selective in which Nasdaq hedging tools they bought. For example, according to data from Nations Indexes, two weeks ago, the prices of put options on the Nasdaq market were higher. Charlie McElligott, managing director at Nomura, wrote that out-of-the-money S&P 500 index put options “are not being aggressively bought at this moment,” indicating that investors remain calm as the stock market declines.

McElligott stated in a report to clients last Friday: 'This week, the spot stock market has been declining for several days, and index options did not show a particularly obvious reaction to this; even if there was any reaction, part of it was due to the volatility of call options being suppressed.'

One possible explanation for the insufficient hedging demand is that asset management firms are rapidly selling stocks, rather than using options to protect those stocks from further declines.

A popular chart that circulated widely over the weekend came from Morgan Stanley's principal brokerage business department. According to data from this department on long and short active managers, the total global stock exposure has decreased by 8% from its most recent peak, marking the largest drawdown in at least a decade.

Chicago's Chief Investment Officer Convexitas stated: "The long-short strategy has undergone a large-scale deleveraging event. We bought back the short positions and sold off the long positions. If your position is now closer to cash than before, then there is no need for further hedging. I believe this is the main reason why implied volatility has remained calm despite the increasing pressure this month."