Trader enthusiasm for options betting on further S&P 500 gains is intensifying, as the benchmark index, which has been overshadowed by the more volatile Nasdaq 100 for months, now regains fervent interest from the options market. On Tuesday, call option contract volume on the S&P 500 surged past 4 million, setting a new record, while put option volume remained near average levels. Jason Coogan, a senior trader at Simplex Trading who operates on the floor of the Cboe S&P 500 options exchange, described the market as seeing a "one-way order flow" over the two consecutive trading days ending Tuesday. This marks a significant shift from the pattern of the past two months, when traders largely avoided making large directional bets on the S&P 500 due to a lack of overall index volatility and lower correlations among individual stocks compared to the tech-heavy Nasdaq 100.
Even after the recent rally, Max Grinacoff, a strategist at UBS Group AG, suggests that S&P 500 options overall remain relatively cheap, as the upside from better-than-expected earnings has not yet been fully priced in. "Potential earnings growth, especially from the 'tech-plus' group, is not yet fully reflected in valuations," Grinacoff said in a phone interview, adding that the market is still digesting the recent wave of strong earnings reports. "We are fundamentally quite bullish on the outlook," the bank's head of equity derivatives research noted. Grinacoff expects the S&P 500 to end the year at 8,100 points, representing nearly 5% upside from Wednesday's closing price. His bullish outlook is heavily dependent on market participation broadening from tech giants to the wider economy. Although the S&P 500 notched its first all-time high since June on Tuesday, its equal-weight version has already set 12 new records during the same period. Growing optimism about the prospects of an Iran agreement, corporate profit expansion at a pace comparable to major post-recession periods, and economic data showing record business activity have further bolstered the bullish sentiment.
"This isn't just 'tech-plus' dominance," Grinacoff said, referring to the primary beneficiaries of the AI wave. "You're starting to see a rising tide lifting all boats, and tech stocks are no exception." Meanwhile, Grinacoff noted that implied volatility for the S&P 500 could remain elevated even as the index rises. "If the S&P is up 2% a day, volatility can't help but follow," he added. Whether the demand for call options can persist remains uncertain. On Wednesday, as the index pulled back from its record high, trader preference for upside contracts cooled somewhat. However, the recent surge in call trading has shifted the index's put/call skew. Relative demand for call options betting on a 10% rise in the benchmark index over the next month has jumped to its highest level since March compared to contracts betting on an equivalent decline. "Companies are continually delivering results that beat already high expectations," wrote Scott Rubner, head of equities and equity derivatives strategy at Citadel Securities, in an August 3 report. "The market is transitioning from a flow-driven environment to one increasingly dominated by earnings."
For investors positioning for further S&P 500 upside, UBS strategists recommended a trading strategy on July 20: sell downside hedges on the iShares Semiconductor ETF (SOXX) and use the premium to buy six times the number of S&P 500 call options. Though this trade appeared highly risky during the semiconductor sector's decline in late July and early August, it now seems prescient. Other investors employed a more direct approach in Tuesday's frenetic trading: buying naked call options. According to Susquehanna International Group's analysis, notable trades that day included an investor purchasing 120,000 call options on the SPDR S&P 500 ETF Trust (SPY) with a $775 strike price expiring August 14, at a cost of approximately $3.35 each, for a total premium of about $40 million. As of Wednesday midday, that position was trading at around $5.27, representing a market value of roughly $63 million. "The options market is pricing in FOMO sentiment," said Tanvir Sandhu, a global derivatives strategist. "Investors seem more concerned about missing the next leg of the rally than protecting against downside risk, as evidenced by the massive shift in skew indicators. The strong demand for upside calls is keeping implied volatility elevated even as stocks rise."
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