FOMO panic buying detonates S&P bullish options, and the market is surprised by a “one-way order flow”

The Zhitong Finance App learned that traders' enthusiasm for options betting on the further rise in the S&P 500 index continues to heat up — the benchmark stock index, which has been stealing the limelight by the more volatile Nasdaq 100 index for several months, is now being fervently sought after by the options market.

On Tuesday, the S&P 500's call options contract volume surpassed 4 million, setting a record, while the volume of put options traded remained at the same level as the average. Jason Coogan (Jason Coogan), a senior Simplex Trading trader who trades on the S&P 500 options exchange on the Chicago Board Options Exchange (Cboe), described that for two consecutive trading days up to Tuesday, the market showed a “one-way flow of orders” pattern.

This marks a significant shift in the pattern over the past two months — at that time, due to lack of overall fluctuations at the index level and the correlation between individual stocks was lower than the NASDAQ 100 dominated by tech giants, traders basically avoided making broad directional bets on the S&P 500. Even after the recent rise, UBS Group AG (UBS Group AG) strategist Max Grinacoff (Max Grinacoff) said that S&P 500 options as a whole are still relatively cheap, and the upward space brought about by higher-than-expected quarterly reports has not yet been fully priced.

“Potential profit growth, particularly in the 'tech+' group, has not been fully reflected in the valuation,” Grinakoff said in a telephone interview, adding that the market is still digesting recent intense strong financial reports. “We are quite optimistic about the future market from a fundamental point of view,” the bank's head of stock derivatives research pointed out.

Greenakoff expects S&P 500 to close at 8,100 points at the end of the year — there is still nearly 5% upside compared to Wednesday's closing price. He believes that multiple cornerstones are highly dependent on market participation spreading from tech giants to the wider economic sector. Although the S&P 500 recorded its first all-time high since June on Tuesday, the equal-weighted version of the index has hit 12 record highs during this period. Increased market optimism about the prospects of the Iran deal, corporate profits are expanding at a rate comparable to a major post-recession cycle, and economic data showing record commercial activity have all further boosted the confidence of many.

“It's not just about 'tech+' dominance,” Grinakov said when talking about the main beneficiary sectors of the AI wave. “You're starting to see a rise in price, and tech stocks are no exception.”

Meanwhile, Grinakoff pointed out that even if the index rises, the implied volatility of the S&P 500 is likely to remain high. “S&P is up 2% every day, and it's impossible for the volatility not to keep up,” he added.

Whether demand for call options will continue is hard to predict — traders' preferences for upward contracts cooled down as the index retreated from historic highs on Wednesday. However, the recent rise in call options trading has driven a shift in the index's bearish/call options bias. Relative demand for call options betting that the benchmark index will rise 10% over the next month has jumped to the highest level since March compared to betting on contracts with the same decline.

“Companies continue to deliver results that far exceed expectations,” Scott Rubner (Scott Rubner), head of stock and stock derivatives strategy at Citadel Securities (Citadel Securities), wrote in an August 3 report. “The market is shifting from an environment driven by capital flows to an increasingly profit-driven pattern.”

For investors planning a further upward trend in the S&P 500, UBS strategists proposed a trading strategy on July 20: sell the iShares Semiconductor ETF (SOXX) to hedge against the decline and use the premium to buy six times the amount of S&P 500 call options. Although the deal seemed extremely risky when the semiconductor sector declined from the end of July to the beginning of August, it seems prescient now.

Other investors adopted a more direct strategy in Tuesday's hot trade: buy bullish options naked. According to Susquehanna International Group's analysis, notable transactions of the day included an investor buying 120,000 SPDR S&P 500 ETF Trust (SPY) call options with an exercise price of $775 due on August 14 at a price of about $3.35, with a total premium of about $40 million. As of noon on Wednesday, the position was trading at around $5.27, corresponding to a market capitalization of around $63 million.

“The options market is pricing FOMO sentiment,” said Tanvir Sandhu (Tanvir Sandhu), a global derivatives strategist. “Investors seem more concerned about missing out on the next wave of gains than preventing the risk of a pullback, as can be seen from the dramatic shift in biased indicators. Strong demand for upward bullish options has kept implied volatility strong amidst rising stock markets.”