Stock Market Today: Dow falls over 150 points after Powell's remarks as traders trim bets on aggressive rate cuts

An unusual pattern that emerged in the stock market last week suggests traders scooped up protection that would buffer their portfolios from another market-shaking selloff in October, according to a report from Cboe Global Markets shared with MarketWatch on Monday.

Both the Cboe Volatility Index, better known as Wall Street’s “fear gauge,” and the VVIX, which measures demand for options contracts tied to the VIX, rose last week even as the S&P 500 trended higher.

Seeing both of these volatility indexes rise alongside the U.S. benchmark is fairly unusual, according to Cboe’s Ed Tom, senior director of derivatives-market intelligence. It suggests traders bought up options contracts that would protect their portfolios from any losses over the coming month, even as they continued to push stocks higher.

These moves were driven by an increase in demand for put options tied to the S&P 500 and call options tied to the VIX, Tom said. Buying a put gives the holder the option to sell a stock at an agreed-upon price before an agreed-upon expiration; they tend to pay off when the underlying stock or index falls. Call options, meanwhile, represent a bet that the underlying index or asset might climb.

Investors favored out-of-the-money put options on the S&P 500, causing a metric known as “skew” to increase, reflecting higher demand for out-of-the-money contracts compared with those with strike prices closer to where the market was trading at the time.

Call options on the VIX, meanwhile, represent a bet that implied volatility tied to the S&P 500 will spike. Volatility tends to rise more quickly when stocks are falling, and VIX calls are often seen as a form of insurance against a dramatic drop in prices.

A rising VVIX suggests traders scooped up VIX calls last week as well, and Cboe data confirmed the jump in demand.

“Taken together, last week’s VIX/ VVIX dynamics are suggestive of increased precaution as traders position their books for the seasonally volatile month of October,” Tom said in the report.

Stocks sold off to start both August and September, before quickly recouping their losses. Now, traders appear to be bracing for more wild swings ahead, as election-year Octobers tend to see more market volatility than during nonelection years, according to an analysis by CFRA’s Sam Stovall.