By Saqib Iqbal Ahmed
NEW YORK (Reuters) – Fear of missing out on the recent stock market rally is driving traders in the U.S. equity options market to lap up bullish derivative contracts at a hectic pace, further fueling gains for stocks, analysts said on Friday.
The S&P 500 Index has risen nearly 8% over the past month to its highest level in more than a year, with recent sessions marked by a powerful rush into call options that are typically bought to express a bullish view on prices.
On Thursday, a record 1.8 million S&P 500 calls traded. While about two-third of it was in very short-dated contracts, the strong activity points to investors preparing portfolios for the possibility of further gains for equities in coming weeks and months, analysts said.
The rush into call options lifted the S&P 500 Index’s 1-month moving average of calls-to-puts to the highest in at least 4 years, according to Trade Alert data. The index is up about 15% year-to-date, while the tech heavy Nasdaq 100 Index has gained 39%.
Call skew – a measure of demand for call options – has also moved markedly higher, with one 90-day measure of skew on the iShares Russell 2000 ETF leaping to two-year highs from two-year lows in the course of the last two months, a Susquehanna analysis showed.
“(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,” Susquehanna strategist Christopher Jacobson said.
Some of the rush into call options has also helped fuel the rally, said Brent Kochuba, founder of options analytic service SpotGamma.
As traders buy calls, market makers and dealers that sell these calls are forced to balance their positions by buying the underlying stocks or indexes, helping push markets higher, he said.
Such extreme activity in call options, however, warrants some caution in the near term, said Kochuba, who expects some form of a market pullback in the near term.
“The trend is probably higher… but in the very short term we have gotten over our skies,” Kochuba said.
(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Nick Zieminski)