Demand for S&P 500 call options that would profit from further upside has become overwhelming. On Tuesday, the number of call contracts tied to the benchmark stock gauge exceeded 4 million for the first time ever, while put volume stayed close to its average.
Jason Coogan, an S&P 500 options pit trader at Simplex Trading on Cboe Global Markets, watched two days of orders heading into Tuesday and described the flow as "a one-way flow in orders."
Over recent months, the Nasdaq 100 overshadowed the S&P 500 with its wider swings. Over the past two months, many traders avoided major directional wagers on the S&P 500 because the index wasn't showing much overall volatility and correlations between its stocks were weaker than those in the tech-heavy gauge. Tuesday marked a departure.
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Despite the recent surge, Max Grinacoff, head of equity derivatives research at UBS Group AG, said S&P 500 options still look inexpensive because the market has not fully priced in the potential upside from stronger-than-expected earnings.
"The potential earnings growth, particularly coming from 'tech-plus' cohorts are not fully priced in to valuations," "Grinacoff said by phone, adding that the market is still readjusting to a spate of strong earnings". "We are fundamentally quite bullish."
His team at UBS projects the S&P 500 will close this year at 8,100, nearly 5% above Wednesday's close. Grinacoff's outlook is built largely on the idea that the rally is spreading well beyond big technology companies. Tuesday brought the S&P 500 its first record since June, and an equal-weight version of the index has set 12 all-time highs during that period. Bulls found extra confidence in progress toward an Iran deal, earnings growth at a pace typically seen only after major downturns, and data showing business activity at a record.
"That is not just 'tech-plus' dominance," Grinacoff said, alluding to the companies that have led the AI trade. "You start to see a rising tide lift all boats, including tech."
Grinacoff also expects S&P 500 implied volatility to stay elevated even with the index rising. "You can't have the S&P moving up 2% a day and not have vol bid up," he added.
It is unclear how long the call-buying spree will last. On Wednesday, the S&P 500 slipped from its record and traders eased up on upside contracts. Even so, the burst of call activity has shifted the balance between puts and calls on the benchmark.
One-month calls that pay off if the S&P 500 rises 10% were more heavily bid than puts that pay off on a 10% drop, with the gap the most lopsided since March. The index rose 0.2%.
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