Option traders are sending a clear signal through derivatives markets: the tech stock rally still has room to run.
Data shows near-record levels of call option open interest for the "Magnificent Seven" tech stocks compared to puts, reaching highs not seen since March 2023. This positioning suggests traders anticipate further gains through at least January.
"Buying year-end hedges against tech stocks has been pure money-wasting over the past year or two," said Matt Maley, chief market strategist at Miller Tabak + Co. He noted institutional traders must buy stocks regardless of their outlook when markets rally into year-end.
The derivatives activity helps ease concerns about peak tech valuations. The tech-led rally has propelled the S&P 500 up 27% since early April and 16% year-to-date, though some strategists have grown cautious.
Bullish Signals From Options Market
Derivatives markets are flashing clear bullish signals.
The Magnificent Seven's call option open interest approaches 2023 peaks versus puts, reflecting expectations for continued upside. AI optimism has driven the tech benchmark up 25% this year, with Nvidia becoming the first $5 trillion company. These seven tech giants account for most market gains.
Institutional confidence remains strong, with most of 39 global fund managers surveyed believing valuations aren't stretched, seeing fundamental support for a new industrial cycle.
While questions linger about tech valuations, Fed rate cut expectations have eased concerns. The tech sector's relative volatility measure has halved from 8% to 4% over two weeks.
Improving rate conditions support tech stocks by lowering financing costs for growth companies and boosting present value of future cash flows.
The optimism extends beyond tech. Broad market call option demand is rising faster than puts, with Cboe's Mandy Xu noting increased S&P 500 call buying.
However, not all share this view. IUR Capital's Gareth Ryan expects an early-year pullback, predicting "a retest of 6,500 lows in early 2026."
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