With GameStop Corp. in retreat, sings of normalcy emerged on Wall Street. Which in 2021 means traders were free to get back to stressing about SPACs, crypto and all those Faang options still in circulation.

Given the backdrop, it no surprise that volatility futures are refusing to sound the all clear. Contracts on the Cboe Volatility Index showed traders are wagering on an elevated level of price swings all the way through March. In options, the cost of S&P 500 puts rose to a three-year high relative to calls, a sign of caution among options traders.

The big drama may be receding, but plenty remains to be anxious about, including stretched valuations, the pace of economic recovery and the rollout of coronavirus vaccines. Possibly as a result, when hedge funds make bearish bets, they have shifted their focus to exchange-traded funds, rather than single stocks.

“With elevated volatility now, the conversation isn’t as much about these individuals names, it’s, ‘hey are we in a bubble?”’ said Chad Oviatt, director of investment management at Huntington Private Bank. “Volatility will certainly be the shiny object, something that people get concerned about.”

GameStop, AMC Entertainment Holdings Inc. and Koss Corp. each tumbled at least 33 per cent as of 12 p.m. Tuesday in New York. As is becoming customary, their losses were the rest of the market’s gain. The S&P 500 rose for a second day, climbing within 0.4 per cent of its record close of 3,855.36 reached last week.

While the VIX fell 4 points to 25.92, it remains above its long-term average of 19. Futures on the gauge are pricing in higher volatility through March. Even though the slope of the curve plotting future prices turns lower in April, levels through September remain at least one standard deviation above the long-term mean, DataTrek Research found.

“Options markets aren’t treating the last few days’ elevated U.S. equity market volatility as a short-run phenomenon,” Nicholas Colas and Jessica Rabe, co-founders of DataTrek Research, wrote in a note to clients. “They don’t see vol returning to ‘normal’ for many, many months.”

While bullish options on single stocks have made headlines during the Reddit craze, in the S&P 500, bearish ones command the highest prices. Options skew in the index, the cost difference between the index’s puts versus calls, last week rose to the highest since early 2018.

“Implied volatility was up broadly, but more so in the downside puts as investors worried about market dislocations leading to broader contagion,” Chris Murphy, Susquehanna International Group’s co-head of derivatives strategy, wrote in a note to clients. “While the SPX is pricing in more risk to the downside than the upside than usual, the opposite is happening on the single stock level. It will be hard for both to be right.”

While it appears the the Reddit army is turning away from the most-shorted stocks where they rung up spectacular gains, there are few signs that they’re exiting stocks en mass. In fact, their favorite stocks tracked by Goldman Sachs added 0.1 per cent Tuesday.

At the same time, hedge funds, while covering short sales in single stocks, are boosting bearish wagers against exchange-traded funds, according to Goldman Sachs Group Inc.’s prime brokerage unit. At Monday’s close, ETFs accounted for one-fifth of clients’ short book, the highest level since Goldman began tracking the data since October 2012.

Partly because of the expansion, the industry’s gross leverage, or a measure of risk appetite that takes into account both bullish and bearish equity bets, stayed heightened, sitting in the 95th percentile of a one-year range, Goldman data show.

“While leverage has been reduced significantly in just a few days, we think it has further to go,” Mike Wilson, chief U.S. equity strategists at Morgan Stanley, wrote in a Monday note. “We don’t think the correction is over until leverage is reduced further by both institutional and retail investors.”