Bullish Options Trading Fuels Stock Market Rally Amid FOMO

In the United States equity options market, traders are engaging in a frenzy of bullish derivative contracts, spurred by the fear of missing out (FOMO) on the recent stock market surge. Analysts observed that this enthusiastic trading activity is further propelling the gains for stocks.

Over the past month, the S&P 500 Index has surged by nearly 8%, reaching its highest level in over a year. Notably, there has been a substantial rush into call options, which are typically purchased to express optimism about price movements.

On Thursday, an astounding 1.8 million S&P 500 calls were traded, marking a record-breaking figure. Although a significant portion of the trades involved very short-dated contracts, this heightened activity indicates that investors are positioning their portfolios to capitalize on potential future gains in equities over the coming weeks and months.

The influx of call options has propelled the S&P 500 Index's 1-month moving average of calls-to-puts to its highest level in at least four years, according to data from Trade Alert. Year-to-date, the index has climbed approximately 15%, while the technology-heavy Nasdaq 100 Index has surged by an impressive 39%. Call skew, a measure of demand for call options, has also experienced a notable increase. Analysis from Susquehanna revealed that a 90-day measure of skew on the iShares Russell 2000 ETF has soared to two-year highs after hitting two-year lows in the previous two months.

Christopher Jacobson, a strategist at Susquehanna, highlighted, "(It) suggests that there are a number of investors who are hesitant to buy the stocks at these levels but who are understandably grappling with questions on valuation and are fearful of missing out should stocks continue to rise."

Furthermore, the surge in call options has not only contributed to the rally but also impacted market makers and dealers who sell these options. As traders purchase calls, market makers and dealers are compelled to balance their positions by acquiring the underlying stocks or indexes, thus exerting upward pressure on the markets, according to Brent Kochuba, founder of options analytic service SpotGamma.

However, caution is advised in the near term due to the extreme activity surrounding call options. Kochuba anticipates some form of market pullback in the near future, stating, "The trend is probably higher... but in the very short term we have gotten over our skies."

The enthusiasm and FOMO-driven trading in the options market serve as a testament to the current market sentiment. While it fuels the ongoing rally, investors are advised to remain vigilant, keeping in mind the potential for short-term market corrections.

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