To The Moon

$2.4 trillion options set to expire on Friday, a lot of it on 4500 $S&P 500(.SPX)$.

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U.S. stocks rebounded after this week's U.S. Consumer Price Index (CPI) data, with traders buying call options tied to popular U.S. equity exchange-traded funds (ETFs). Options market strategists said that could help push stocks higher in the coming days.

However, options related to $2.4 trillion in stocks, ETFs and stock indexes are set to expire on Friday, according to data compiled by Rocky Fishman, founder of U.S. options market analysis provider Asym50.

Charts from a Goldman Sachs Group analyst team show bullish buying tied to popular index ETFs exploding this week. However, with about one-third of the call options tied to $iShares Russell 2000 ETF(IWM)$ set to expire on Friday, some of the momentum that drove small-cap stocks sharply higher over the past two weeks could fade if traders choose not to roll over. $iShares Russell 2000 ETF(IWM)$ is an ETF that tracks the Russell 2000 Index, a popular index of small-cap stocks.

The surge in call option demand could also be a sign that as U.S. stocks that have lagged big tech stocks all year continue to catch up, more traders will pile into small-cap stocks in the hope that they can continue to climb higher.

Call options represent a bullish bet on the underlying security or index, and put options are the opposite. Options can be used to speculate on market direction or to hedge an investor's portfolio.

At the same time, investors are still looking forward to the "Christmas market" at the end of the year. For context, corporate earnings were strong in the third quarter and inflation continued to fall. However, with the market already pricing in all the good news and intense competition for bond yields, there is less room for the usual seasonal gains.

Lower-than-expected inflation data released on Tuesday left investors optimistic. Since then, the $S&P 500(.SPX)$ and $X STOXX EUROPE 600(XSX6.UK)$ have gained 2.1% and 1%, respectively, nearly erasing losses from early August as they rebounded in November. The two indexes are up 17% and 6% respectively in 2023.

That was helped by good consumer spending data and a third-quarter earnings season that, despite a slow start, ended up performing better than Wall Street expected. A "soft landing" that many economists thought was impossible for the U.S. economy now appears to be the most likely outcome.

Investors have good reason to expect more gains. An analysis by JPMorgan shows the Federal Reserve may have announced its last rate hike, which historically has almost always caused the 10-year U.S. Treasury yield to fall lower in the coming months. Down in 12 months, the bond market has now expected this.

Additionally, U.S. stocks tend to perform well in the last quarter of the year. Starting in 1987, the MSCI All Country World Index has averaged a total return of 4.4% between October and December, making it the best time to invest, according to Ned Davis Research. Some evidence points to a "Santa Claus rebound" around the holidays. This may be driven by individual investors caught up in the holiday spirit, or it may be more pragmatic, anticipating that professional money managers will return to work in January, ready to deploy their risk budgets for the year.

But there's a big problem: The market has already priced in a lot of optimism. The $S&P 500(.SPX)$ currently trades at 18.7 times expected earnings for the next 12 months. That's well below the 2020 peak, when the multiple hit almost 24, but in line with pre-pandemic highs.

That could help push stocks even higher in the days ahead, options-market strategists said. Pimco's bond chief says investors need to prepare for a hard landing