Everyone wants a piece of the new bull market.
Traders are piling into bullish options bets that would profit if the recent stock rally continues. There has been a flurry of trading tied to continued advances in everything from artificial-intelligence stocks to smaller, economically sensitive companies and regional banks.
The activity suggests the dour outlook with which many investors began the year has softened as the S&P 500 has rallied 13%. The tech-heavy Nasdaq Composite has soared 29% in 2023, on track for its best start to a year since 1983.
Bullish bets on artificial intelligence have boomed. More than 1.3 million call contracts on chip makers Nvidia, Intel and Advanced Micro Devices changed hands on an average day in June, on track for the highest monthly total on record. Those volumes surpass the exuberance seen in November 2021, when the Nasdaq Composite reached its peak. Trading activity has more than doubled since the start of the year, Cboe Global Markets data show.
Calls give the right to buy shares at a specific price, by a specific date. Puts confer the right to sell.
There has also been record activity tied to S&P 500 index options, with one-day trading in calls surging, according to Cboe Global Markets data. The elevated trading has pushed up prices of such call options to extreme levels, a sign of ebullience .
"Fear of missing out is back," said Stephen Solaka, a managing partner at Belmont Capital Group, which oversees options-based strategies.
In the coming days, traders will parse data on consumer confidence and inflation to gauge the health of the economy and forecast the trajectory of the market.
To be sure, some of the recent market fervor moderated last week when Federal Reserve officials reiterated their commitment to keep raising interest rates -- and worries about commercial real estate began to build. The S&P 500 fell 1.4%, snapping a five-week winning streak.
Still, the rally to kick off 2023 caught traders flat-footed and burned those who bet against the market. Many of those investors say the U.S. economy has held up much better than they expected and the jobs market has been less sensitive to rising interest rates than anticipated. Now, even those who previously took a more cautious stance say they simply don't want to miss out on the potential for big gains ahead.
"I think the recession got delayed," said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management.
Ren said he has been bearish on the U.S. stock market for much of the year but, in recent weeks, decided to ride the momentum in the S&P 500 higher via index call options. That helped him notch quick profits from the ascent in stocks.
So far, that fear of missing out has created a wide gap between the market's winners and losers, though there are signs that is starting to turn. By one measure, the current stock-market rally has been its most narrow since the dot-com bubble in 2000, with a handful of tech stocks driving the returns, according to Goldman Sachs Group.
Buzz about artificial intelligence has hit a fever pitch. Shares of Amazon and MongoDB recorded large one-day pops on Thursday, for example, as the companies made announcements regarding AI.
The excitement in the options market has sent skew -- an options-based measure of pessimism versus optimism -- to some of its lowest levels since at least 2019. That qualifies as a sign that traders are loading up on calls rather than puts.
"A lot of people are coming around to the view that the stock market may have already bottomed last fall," said Amy Wu Silverman, RBC Capital Markets' head of derivatives strategy.
The enthusiasm has started spreading to other corners of the market, a sign some traders are positioning for this year's laggards to catch up to hot tech stocks. For example, there has been a jump in call demand tied to small caps, which have underperformed in recent months. Investors are also pouring money into small-cap funds, many of which are dominated by shares of regional banks and other stocks that are sensitive to the health of U.S. consumers.
Ten of the 11 sectors in the S&P 500 have risen in June.
Referring to the flurry of tech options trading, Brent Kochuba, founder of derivatives-data firm SpotGamma, said, "The signal you would expect to see before a blowup is a lot of put buying, traders betting these stocks have huge amounts of downside. That just isn't happening right now."
There are other signs investors have a sunnier outlook on stocks than they did just a few months ago. Positioning in U.S. stocks is stretched for the first time in more than two years, a Goldman indicator shows. While the low-volatility environment encouraged quant funds to scoop up stocks early in the year, now discretionary investors are joining in, according to Deutsche Bank.
"If you started the year bearish, you've been really underallocated," Wu Silverman said. "Investors are looking at a market that's rallied 14% and, almost not by choice, they feel the need to hop on the train."