Options traders "shift from defense to offense"! Big bets on the continuation of the rebound momentum in U.S. stocks
As the tensions in Sino-U.S. trade ease and the U.S. inflation data for April comes in below expectations, options traders are beginning to place large bets on a rebound in U.S. stocks. The volume ratio of call options to put options has reached its highest level since February, boosting market confidence that the S&P 500 index will rise to 6,150 points in September. The rapid decline of the VIX index also indicates a shift in market sentiment, although the sustainability of long-term optimism remains in question
According to Zhitong Finance APP, for stock options traders, greed has now firmly replaced fear, as they are buying call positions, betting that the U.S. stock market will continue its rebound from last month's lows. In U.S. stock exchanges, the volume ratio of call options to put options is hovering at its highest level since February 18, which was the day before the S&P 500 index set its previous historical high. Meanwhile, according to data from Susquehanna International Group, the options market is also reflecting an increasing confidence that the S&P 500 index will rise to a new high of 6,150 points in September.
This shift in market sentiment is in stark contrast to last month, when economic and political concerns triggered by tariffs put the U.S. stock market on the brink of a bear market and boosted traders' demand to hedge against further declines. However, as U.S.-China trade tensions have eased and U.S. inflation data for April came in below expectations, the worst-case scenario that the market feared did not materialize, prompting options traders to bet on further gains in the U.S. stock market. Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, stated, "Compared to the panic during the previous decline, the market is now more concerned about missing out on the upward trend."
Another bullish signal comes from the Chicago Board Options Exchange Volatility Index (VIX). According to Bespoke Investment Group, this index fell from 40 to below 20 in just 21 trading days, marking the fastest decline on record. In the past four instances where the VIX dropped from 40 to below 20 in less than 100 trading days, the S&P 500 saw gains in the following 1 month, 3 months, 6 months, and 12 months.
The rising "animal spirits" in the options market reflect an increasing belief that the market can withstand the economic shocks brought about by the trade war, at least in the short term. However, there are still divergences. Whether this optimistic sentiment can be sustained in the long term remains uncertain, as trade agreements are still under negotiation and corporate earnings guidance is at a low point compared to recent years.
Options strategists from 22V Research and Bank of America suggest that investors continue to hold downside hedge positions. Brent Kochuba, founder of options research firm SpotGamma, expects that the S&P 500 index will encounter resistance between 5,900 and 6,000 points. He noted that a large batch of call options expiring on Friday "could lead to a short-term market pullback next week."
Meanwhile, Vishal Vivek, equity and derivatives trading strategist at Citigroup, believes that systematic hedge fund buying will provide support to the stock market in the coming weeks. He added that these funds have been waiting for buying signals, "The level of panic has clearly decreased over the past month, which will encourage investors to truly re-enter the market."
