Bullish options trading has amplified the U.S. stock market’s advance, potentially exaggerating market swings in the coming days or weeks. The S&P 500’s 17% rally this year to record highs has brought the index close to the 7,000 mark, accompanied by a surge in bullish options activity. Strong demand for call options earlier this month pushed the one-month rolling calls-to-puts traded ratio to its most bullish level in roughly four years, according to a Reuters analysis of Trade Alert data.
As explained by SpotGamma founder Brent Kochuba, investors have been eagerly anticipating the move toward the 7,000 level. This rush into upside call options has left options dealers as net sellers of options, a position known as ‘short gamma’. Dealers typically aim to maintain market neutrality, but in a short gamma position, they often sell stock futures during market declines and purchase them during rallies, intensifying price movements in both directions.
Susquehanna Financial Group’s Chris Murphy noted the prevalence of extreme upside call buyers, leading market makers to adopt a short gamma position. This dynamic suggests that if the S&P 500 climbs above 7,000, the rally could receive additional momentum from options dealers’ hedging activity. However, analysts warn that this short gamma positioning carries risks in both directions, with any decline in the benchmark index potentially exacerbated by derivatives-related trading as options dealers sell stock futures into a weakening market.
Nomura strategist Charlie McElligott sees a potential ‘window for a 3% to 5% pullback’ in U.S. stock indexes in the coming weeks. Kochuba added that the market may pull back from current levels. On Thursday, the S&P 500 and the Nasdaq both declined as Meta Platforms and Microsoft slid on concerns about rising artificial intelligence spending and the pace of monetary policy easing from the U.S. Federal Reserve.
