It's like a replay of the 1990s, FOMO overwhelms everything, and U.S. stock options traders are caught in a frenzy

At a time when investors should be worried about tariffs, growth, and changes in Federal Reserve policy, their biggest fear is missing out on further gains in the stock market.

Options data shows that as the U.S. stock market continues to hit new highs, traders are flooding into call options with nearly record enthusiasm, with the volume of call options trading in the individual stock options market exceeding that of put options at the highest level in about four years.

Barclays' stock frenzy indicator shows that there is a sustained high bullish sentiment among retail investors, with a one-month moving average of about 14.3%, nearly three standard deviations above the long-term average. This frenzied trading environment has analysts recalling "post-cycle excessive optimism," with Greg Boutle, head of U.S. equity and derivatives strategy at BNP Paribas, stating that the current environment "is starting to feel a bit like the late 1990s."

Historical data shows that once a significant proportion of stocks begin to exhibit signs of frenzy, it typically signals reduced future returns. Barclays analysis indicates that high levels of frenzy sentiment have historically preceded a pause in market momentum, but analysts also warn that as the lessons of the late 1990s show, even bubbles can last longer than expected.

Options Market Indicators Show Extreme Optimism

The surge into call options is driving key indicators in the options market to unusual levels.

The rebound in the S&P 500 index has pushed its one-month implied volatility down to 6.7%, nearly a historical low. However, at the same time, the Cboe S&P 500 Constituent Volatility Index, which measures investors' expectations for individual stock volatility, has climbed to a high not seen in over five months.

Additionally, the "skew" indicator, which measures the market's demand for downside protection versus upside speculation, has also reversed. Concerns about missing out on gains have overwhelmed typical worries about stock price declines. Stefano Pascale, head of U.S. equity derivatives research at Barclays, noted that the proportion of stocks with negative skew has sharply increased in recent months, "which is a typical sign of frenzy."

The current trading environment is reminiscent of historical speculative peaks. Boutle from BNP Paribas believes that this frenzied trading condition evokes "the boom at the end of a cycle":

"The environment we are in is starting to feel a bit like the late 1990s."

Barclays' "stock frenzy indicator" also corroborates this view. This indicator, based on derivative flows to measure the intensity of investor sentiment, currently has a one-month moving average of about 14.3%, nearly three standard deviations above the long-term average, indicating sustained high bullish sentiment among retail investors.

"Positive Cycle" Led by Tech Stocks

Investor optimism is largely concentrated on a few high-flying stocks that have driven the stock market's rise this year. Chris Murphy, co-head of derivatives strategy at Susquehanna Financial Group, stated:

"Investor demand for individual stock call options has remained extremely strong, especially in the fields of artificial intelligence, semiconductors, and metals."

Data shows that the technology-heavy NASDAQ Composite Index has risen about 19% this year, while the S&P 500 Index has increased by 15%. AI-related stocks, including Nvidia and Broadcom, have seen gains of approximately 38% and 45%, respectively. As the market has rebounded significantly from the tariff-related pullback in April, investors have become bolder in increasing their stock allocations. Strategists say that some latecomer investors are using options to make up for missed gains.

This strong inflow of bullish capital can also trigger a "positive feedback loop": investors buy call options, and the option traders who sell these contracts must buy the underlying stocks to hedge their own risk exposure when stock prices rise, which in turn further drives up stock prices. Barclays' Pascale stated:

"We are indeed seeing a lot of this, especially in AI-related stocks."

Risks Behind the Frenzy: Returns May Diminish

Despite the bullish market sentiment, history shows that this kind of frenzy often signals a weakening of future returns. Barclays' analysis indicates that when too many stocks begin to show signs of euphoria, it typically foreshadows a decline in future returns. High levels of exuberance have historically often preceded a pause in market momentum.

Barclays' exuberance indicator specifically points out that once a stock shows these signs for several consecutive trading days, its subsequent average performance is often negative. Pascale remarked:

"If you start to see overextended positions and evidence of euphoria... it's a bit like bad news."

However, no one can accurately predict how long this situation will last, leaving investors in a dilemma. BNP Paribas' Boutle stated:

"One of the lessons we learned from the late 1990s is that even if you think it's a bubble... the strength and speed of these trends can far exceed expectations, shorting or exiting too early can also be very painful."

This forces investors to seek a balance between chasing gains and guarding against a reversal in market sentiment. Boutle noted:

"Currently, when we communicate with clients, the frequency of discussions about hedging upside risks is as much as those about hedging downside risks."

Risk Warning and Disclaimer

The market carries risks, and investment should be approached with caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at their own risk