In Washington, debt-ceiling brinkmanship is threatening to push the US into default. And on Wall Street, traders are gaming out what could be a rare “black swan” event.
In the options market, hedges against a volatility breakout are seeing the most demand in five years. The cost to protect against a market sell-off of around 10 per cent, or one-standard deviation, is the highest in a year. Demand for tail-risk hedges that pay out in a fall as precipitous as 30 per cent, or three deviations – a black swan event – has risen to levels last seen at the peak of March’s banking turmoil.
