Investors in U.S. stocks are increasingly worried about missing the rally rather than preparing for a market drop, according to a BlockBeats report published Aug. 14, as major equity indexes continue to push to record highs.
The S&P 500 has gained about 23% since late March. Strong corporate earnings, easing inflation pressure, and reduced market expectations for further Federal Reserve rate hikes have all fed into heavier institutional demand for call options.
Call option demand rises across S&P 500 names
Data from Citadel Securities showed that in at least 170 S&P 500 components, demand for call options has moved above demand for options tied to market turbulence. The spread between the two has reached its highest level since at least 2016.
Scott Rubner, head of equity and equity derivatives strategy at Citadel Securities, said the scramble for upside exposure is nearing historic highs.
Steve Sosnick, chief strategist at Interactive Brokers, called this type of trade “fear of missing out insurance.” In his description, investors who do not want to chase the underlying stocks directly are using call options to keep a path open to participate in further gains.
Lower volatility makes hedging cheaper
Implied volatility has continued to fall at the same time. The VIX index has dropped to its lowest level since January this year, and the equal-weight VIX index has also fallen to its lowest point since March 17, making downside protection relatively less expensive.
On Thursday, one large institutional investor spent $23.4 million on a large put-option position, betting that the hedge would deliver a sizable payoff if the S&P 500 were to plunge 38% before Dec. 18.
Sosnick said the current setup combines aggressive upside chasing with low-cost downside protection, allowing some institutions to stay involved in the rally through call options while also building tail-risk hedges at a lower price.