Options traders are increasingly rotating away from broad macro protection strategies and back into single-stock positioning, as improving risk sentiment and a sharp equity rebound shift attention toward the upcoming earnings season, according to a report by Bloomberg.
Following the recent ceasefire and easing geopolitical tensions in the Middle East, implied volatility across equities, rates and commodities has fallen back toward pre-conflict levels. The decline reflects a rapid unwind of war-related hedges, including index puts and volatility index calls that were previously used to guard against downside risk.
As market conditions stabilise, traders are now repositioning for potential upside in individual equities, particularly large-cap technology stocks set to report results in the coming weeks. The focus has moved from macro uncertainty to earnings-driven dispersion between winners and losers.
The rebound has also revived interest in volatility dispersion strategies, a common hedge fund trade that seeks to profit from differences between index volatility and single-stock volatility. After suffering drawdowns during the conflict-driven spike in correlation, these strategies are seeing renewed inflows as pricing conditions become more favourable.
Traders say the recent V-shaped recovery has benefited investors who maintained long volatility positions ahead of the ceasefire extension, particularly in shorter-dated options where realised volatility exceeded implied levels.
However, positioning remains cautious. Investors note that while markets have recovered quickly, participation in the rally has been uneven, leaving some hedge funds underexposed and now forced to chase upside through more complex or structured option strategies rather than straightforward calls, which have become relatively expensive.
Attention is now turning to earnings season, which is expected to drive stock-specific volatility. Historically, this period tends to widen performance gaps across equities, creating opportunities for dispersion strategies that benefit from divergence between individual stock moves and broader index performance.
Market strategists note that expectations heading into the season remain elevated, with recent upward revisions to earnings forecasts increasing the risk of disappointment. In prior quarters, companies have been penalised more heavily for misses than rewarded for beats, a dynamic traders expect could persist.
At the same time, the gap between implied and realised earnings-related volatility remains wide, keeping dispersion strategies in focus for hedge funds seeking carry and relative value opportunities.
While the sharp repricing of risk earlier in the quarter led to temporary losses for some volatility strategies, hedge funds argue that the underlying fundamentals of dispersion trading remain intact. Many are now re-entering positions using diversified baskets across US and European equities, with an emphasis on managing correlation risk during peak reporting season.
