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Trading in U.S. stock option contracts has surged in 2023 as retail and institutional traders have harnessed bullish call options to chase a runaway rally in U.S. stocks, market analysts told MarketWatch.
As of Friday, 46 million option contracts linked to U.S. equity indexes, individual stocks and exchange-traded funds have traded hands every trading session on average this month, according to an analysis by Callie Cox, a U.S. equity strategist at eToro.
This means that, barring a sudden drop-off in trading activity, June is on track to be the busiest month for option traders ever, Cox said. That is particularly notable given that the summer months are typically more placid on Wall Street.
“It’s pretty incredible for a summer month. It shows how engaged investors are after such a strong rally,” said Callie Cox, a U.S. equity strategist at eToro, during an interview with MarketWatch.
ETORO
Much of the demand has centered on call options: trading volume in these contracts has averaged 26 million a day so far, leaving June on track for the heaviest month of call buying since November 2021, Cox said.
Several overlapping trends have contributed to the surge in option demand, market analysts said.
Investors wary about a rally that recently carried the S&P 500 index to its highest level in 14 months have opted to buy short-dated calls. Often these are contracts tied to the S&P 500 or the index-tracking SPDR S&P 500 exchange-traded fund with less than 24 hours left until expiration, a class of options referred to as “0DTEs” for “zero days to expiration.”
Some traders see these cheap short-term bets as a particularly affordable, if risky, strategy for reaping gains as the market marches higher, according to market analysts and portfolio managers who spoke with MarketWatch.
And when stocks pull back, investors often change their strategy and instead of buying calls, opt to take advantage by buying or selling put options.
While a call represents a bet that a given index, stock or currency will rise, a put represents the opposite.
In addition to betting on calls tied to popular equity indexes and exchange-traded funds like the S&P 500 or the Invesco QQQ Trust Series 1 ETF
QQQ,
investors are also scooping up bullish options tied to Nvidia Corp. and other market leaders, hoping to maximize any returns from the artificial intelligence boom.
The Wall Street Journal reported earlier this week that trading in call options tied to shares of Nvidia Corp.
NVDA,
and two other chip stocks, Advanced Micro Devices
AMD,
and Intel Corp.,
INTC,
has surged fivefold since the beginning of the year, citing data from Cboe Global Markets, owner of the world’s largest options exchange.
But demand for calls has expanded beyond megacap technology names into areas of the market that have trailed since the start of the year, including small-cap stocks and others, which have rallied in June.
The Russell 2000
RUT,
an index that tracks small-cap stocks traded in the U.S., is up nearly 5% year-to-date. As of the end of May, it was marginally negative for the year, options experts said.
“With mega cap technology leading the indexes higher, investors started to play catch-up by trying to buy the second-tier and heavily shorted companies,” said Alon Rosin, head of equity derivatives at Oppenheimer, in emailed commentary shared with MarketWatch.
This means that investors’ rush to try to keep up with the market hasn’t only benefited hot AI-stocks.
Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, made a similar observation in a recent note to clients where she pointed out that call buying has surged for both companies expected to benefit from the AI boom, as well as stocks in an RBC basket of companies that are threatened by it — stocks like Robert Half International
RHI,
Chegg Inc.
CHGG,
and Yext Inc.
YEXT,
she said.
Silverman said heavy call buying in this group is indicative of the market’s “extreme call exuberance.”
Call buying has helped send popular indicators of positioning like the put-call ratio and skew, which measures the cost of downside protection via puts vs. demand for upside exposure via calls, to their lowest levels of the year earlier this month.
“People are reaching for upside via calls, and you’re seeing skew falling due to the fact that everybody has been buying calls,” said Mark Callahan, head of trading and a portfolio manager at Aptus Capital Advisors, during a phone interview with MarketWatch.
Callahan manages several active exchange-traded funds that require heavy option trading.
U.S. stocks have marched higher this year, with the S&P 500 rising for five straight weeks through June 16, its longest streak of weekly gains since November 2021. The Nasdaq Composite
COMP,
has seen even stronger performance, and its eight-week win streak has been heralded as the tech-heavy index’s longest rally since 2019, according to FactSet data.
The S&P 500 has risen more than 13% so far this year, while the Nasdaq has gained more than 30%. Both have erased much of their losses from 2022, which was the worst year for stocks since 2008. Last week, both the S&P 500 and Nasdaq hit their highest levels since April 2022.
However, there are some signs that the torrid rally might be in the midst of a pullback as the S&P 500, Nasdaq and Dow Jones Industrial Average
DJIA,
are all on track to finish the week lower on Friday.
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