Demand for Bullish Equity Options Signals Rising Optimism in Markets
The S&P 500 (SPX) came tantalizingly close to a new all-time high on Wednesday, though early indicators suggest a softer opening for Thursday.
On the bullish front, Nomura strategist Charlie McElligott has issued an optimistic outlook, hinting at the possibility of a market “melt-up.” Known for his accurate predictions—such as the post-U.S. election rally and recent reversals in crowded dollar and bond trades—McElligott’s latest analysis highlights a significant shift in market sentiment.
He notes that investors are pivoting from downside risk hedging through bearish put options to increased enthusiasm for bullish call options on equities. This shift in the options market may indicate the potential for another rally in stocks.
Adding to the upward pressure are volatility-controlled funds, which McElligott estimates could inject around $40 billion into S&P 500 futures as market volatility subsides. These funds, designed to mitigate the impact of market swings, tend to increase stock exposure when conditions stabilize. The S&P 500’s five-day realized volatility has dropped from 22.2 to a low of 8.7, reflecting a notable calming of market jitters.
This repositioning has sparked renewed interest in sectors like Big Tech, AI, semiconductors, small-caps (IWM), and even gold (GC00).
However, McElligott tempers his bullish outlook with a cautionary note. The aggressive buying by volatility-controlled funds and other investors could create instability, potentially disrupting the market’s ability to climb steadily. Instead of a smooth ascent, this exuberance could lead to more erratic moves.
In summary, rising demand for equity call options and reduced market volatility are fueling optimism, but investors should remain mindful of the potential for volatility to return.
