By Martin Baccardax
U.S. stocks have been on a tear, with the S&P 500 rising nearly 20% from the lows of late March and plowing past risks linked to surging oil prices, rising inflation, and the Iran war.
Tech stocks have been scorching, with the Nasdaq rising nearly 30% from its March 30 nadir, powered in part by an astonishing gain of nearly 70% for an index of chip stocks and a 25% surge in the value of the Magnificent Seven.
But developments in the options market are starting to raise questions about the strength of the spring rally and its staying power into the summer months.
Similar questions arose five years ago during the demise of meme stocks, which got that name because they rise and fall with social media buzz and not business fundamentals.
Meme stocks often suffer from what's called a "gamma squeeze," triggered in part by the buying of call options.
Call option buyers have the right, but not the obligation, to purchase underlying shares at a certain price in the future. Call option sellers will buy the stocks linked to the contract to hedge their risk, in order to stay market neutral, and rely on the collection of fees and the time before the option expiry to make their money.
U.S. stocks, at the benchmark level, have seen a massive run in call option buying this month, with seven of the biggest volume days of all time reached over the past 10 days, including around 45 billion in premium traded on Thursday.
That seems to have led to a change in the "market risk" of those options (called delta), with the speed of that increase expressed in what's known as gamma.
To keep pace with the risk, options sellers are forced to buy stocks in order to maintain their hedges, resulting in the "gamma squeeze" of higher stock prices that aren't tied to any real change in market fundamentals.
It's worth noting, as well, that the surge in call option buying has mirrored worrying developments in the broader economy. That is often the case with meme stocks, which soar ever higher even in a vacuum of new corporate information.
Faster than expected inflation prints caught markets off guard earlier this week, while the ongoing surge in global crude has lifted Brent futures more than 9% since last Friday's close.
Few top-tier earnings were on tap this week, as well, and analysts are still pricing in roughly the same first and second quarter growth rates that they were at the end of last month.
Still, stocks are notably higher, with the S&P 500 still up more than 2.8% for the month, and more than 25% over the past year, and the Nasdaq sitting on a May advance of more than 5.2%.
But cracks are starting to form, and the options market might be the first sign of a pullback brewing over the weeks ahead, as Friday marks the expiry of all major index options contracts. That should mean that the hedging call options writers have had to do amid the record breaking run of buying will likely commence after the close of trading.
Some traders are getting a head start. The S&P 500 was down around 74 points, or 0.9%, in early Friday dealing, with the Nasdaq falling around 345 points, or 1.3%.
Heading into next week, and the three-day gap before Nvidia's hotly-anticipated third quarter earnings after the close on Wednesday, markets are likely to find minimal appetite for new risk amid elevated oil prices, the fallout from President Donald Trump's China visit and the spike in Treasury yields that has bonds trading at or near the lowest levels in yield in nearly a year.
Sustained moves higher in the VIX index, which tracks equity market volatility, are also a worry, given that they've come alongside the broader gains in equity markets.
"This has only happened a handful of times in recent decades," noted James Reilly of Capital Economics. "Most recently, those occasions include just before the 'volmageddon' event in early 2018 and around the start of the software stock sell-off in late 2025."
Buckle up.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 15, 2026 12:25 ET (16:25 GMT)
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