Markets Live: ASX nears 2014 high

12:08pm:US equities are at record highs, but a key measure of investor sentiment for future performance indicates a reluctance to chase the market higher, reports the FT.

SP 500 call options, which give the buyer the right, but not the obligation to own the index at a future date, are at their cheapest level since the current bull market began five years ago, according to research from Credit Suisse.

A call option becomes profitable when the underlying asset rises in value beyond the cost of the premium paid by the investor.

“The options market is not seeing a lot of upside potential,” said Mandy Xu, an equity derivatives strategist at Credit Suisse.

This comes as the SP 500 rose to new highs above 1,900 on Tuesday. It has been largely range-bound so far this year, however, rising only 3.4 per cent after 2013’s 30 per cent gain.

Cheap call options are a reflection of the current regime of low volatility, said Ms Xu. The CBOE’s Vix, a measure of equity volatility known as Wall Street’s “fear gauge”, has fallen to 11.51, a historically low level.

It is not unusual for the price of call options and cash equities to move in opposite directions at times when the market is rallying. But, unusually, volatility and, in turn, the price of call options, are cheap across asset classes.

That includes not just equity but also oil and gold, where implied volatility is currently at one year lows, Ms Xu said. The volatility for rates and foreign exchange for G7 countries is also low.

Low volatility has been a consequence of interest rate suppression by central banks in the aftermath of the financial crisis, which has put pressure on the trading revenues of banks.

While options investors are not making large bets on a rally from here, they are also not too worried about a substantial correction either. The equity market has not experienced a major correction since 2012.

Read more at the FT.

Markets Live: ASX nears 2014 high