Bank of England Governor Andrew Bailey spoke to G20 finance ministers about how global markets are currently strong, but he warned that economic and political risks are growing. Since April, asset prices have started to recover due to improved market conditions. Still, we face economic and geopolitical challenges, with global debt levels remaining alarmingly high.

Market Uncertainty

Uncertainty is affecting growth forecasts, so it’s important to stay alert for possible market disruptions. We should carefully study market conditions and investment choices, keeping in mind the significant risks involved. Bailey’s comments echo what many of us feel: everything seems stable on the surface, but big problems are lurking beneath. Markets appear resilient, almost too complacent, while a prominent central banker points out rising economic and political dangers. For those of us in derivatives, this disconnect signals clear opportunities. Bailey’s concern about high global debt isn’t just talk. To put it in perspective, the Institute of International Finance reported that global debt hit a record $315 trillion in early 2024. This high level of leverage makes the financial system very sensitive to the risks he mentioned. Yet, how is the market responding? The VIX, often called the “fear index,” has stubbornly stayed low, around 13, well below its historical average of nearly 20. We’re pricing in calmness despite warnings of trouble ahead.

Strategic Hedging

We’ve seen this scenario before. Remember the calm of late 2019 and early 2020 when the VIX was similarly low before the pandemic sent it soaring above 80? Now is the time to buy insurance when it’s cheap. Currently, market-wide protection is affordable. We should actively look to add hedges. Purchasing out-of-the-money put options on major indices like the S&P 500 for the next 45 to 90 days provides a cost-effective way to protect against sudden downturns. This isn’t just about being pessimistic; it’s about investing in volatility. The steady rise since April, as noted by Bailey, has lowered option premiums. This presents a chance to create trades that benefit from significant movements in either direction. Straddles and strangles on individual stocks in fragile sectors, such as financials facing credit risks or tech stocks sensitive to growth adjustments, allow us to prepare for a shift in this low-volatility environment without needing to guess the direction. We should also consider the origins of these threats. Geopolitical tensions in regions like the Middle East and Eastern Europe directly affect commodity prices. Buying options on oil and gas ETFs is a strategic way to respond. An escalation could lead to rising prices, while de-escalation might cause prices to drop. We don’t need to predict the outcome; we just need to recognize that the current stability is likely temporary. The message is clear: the market is providing well-priced protection and volatility opportunities just when a key central banker suggests we may need them. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now