As technology giants are no longer leading the market rally, traders are shifting their focus to newly listed options contracts to capture short-term opportunities in certain leading stocks. The broadening of this stock market rebound has triggered significant sector rotation, resulting in narrower gains, with the S&P 500 index remaining largely flat year-to-date. As earnings season draws to a close, traders are increasing their positions to hedge against sell-off risks, leading to a heightened skew favoring put options over call options. Additionally, conflicts such as recent geopolitical events mean traders must factor potential consequences into their strategies.
"Not only is skew intensifying at the S&P 500 level as more participants seek portfolio hedges, but we're also seeing more individual stock downside risk being priced in, particularly among mega-cap tech names," said Mandy Xu, Head of Derivatives Market Intelligence at Cboe Global Markets. "Retail traders have grown more cautious toward tech stocks, with call buying activity plunging to levels last seen during the 2022 bear market."
Last week, market attention centered on NVIDIA's earnings. Although obsession with the stock has cooled, it remains a barometer for the broader artificial intelligence theme. Unsurprisingly, derivative trading volume surged in the days leading up to the report as investors placed their bets. Around NVIDIA's earnings release, nearly 50% of its options volume was concentrated in contracts expiring that Friday, highlighting demand for using short-term contracts to speculate on specific events.
Few individual stocks offer as rich a selection of short-dated options as NVIDIA. In late January, Cboe introduced Monday and Wednesday weekly expirations for some of the "Magnificent Seven" stocks—including Tesla and Apple—where previously only Friday expirations were available for single stocks, unlike indices and core ETFs which already offered daily expirations.
A Barclays research report from early February showed that 66% of S&P 500 options trading volume came from short-dated daily expiral contracts. The sustained popularity of these index-based short-term strategies suggests traders may see similar opportunities in individual equities. However, the options selling strategies that dominate zero-day-to-expiration index trading are likely to remain concentrated at the index level rather than shifting to single stocks.
Indices naturally provide diversification, reducing risks from sudden, large moves. For individual stocks, non-systemic "gap" risks can expose investors to potential shocks that threaten fund stability. According to Garrett DeSimone, Quantitative Lead at OptionMetrics, selling zero-day options on individual stocks "is not without significant left-tail risk," meaning exposure to extreme adverse price movements.
He noted that the risk of such extreme volatility in big tech stocks—which could lead to substantial losses for options sellers, a phenomenon he refers to as statistical "skewness"—is "enormous" compared to indices. He added, "For any fund attempting to systematically sell volatility in these single-stock zero-day options, this clearly presents risk management challenges."
At the index level, when zero-day options flows push market makers into a net long gamma position, they dynamically hedge by selling during rallies and buying during dips. This systematic options selling can dampen intraday volatility in the S&P 500. While the diversified nature of indices structurally supports this mechanism, highly liquid large-cap tech stocks could also exhibit similar intraday volatility suppression if short zero-day options positions begin to dominate trading, though likely with less stability.
DeSimone also suggested that although variance risk premiums for the "Magnificent Seven" are currently elevated, these premiums will likely compress as trading volumes continue to rise. "As the new Monday and Wednesday expirations gain traction, we expect this premium to shrink over the next six to seven months," he stated.
Comments