The 7000-point "magnetic field" is effective, with options positions clustered around the S&P 500 integer level, but then what

According to Zhitong Finance APP, despite the U.S. stock market experiencing another outstanding harvest year, this round of the U.S. stock "super bull market" since 2023 is expected to continue strongly. However, from the perspective of leveraged options in the U.S. stock derivatives trading market, there may not be much left in the tank for the S&P 500 index before the end of the year.

Investors tend to trade options close to round numbers, such as the 7000-point strike price, which is a very popular psychological level. However, the activity of options trading betting on the S&P 500 index surpassing 7000 points has significantly weakened, indicating that the S&P 500 index may enter a sideways consolidation or correction after rising from the current level of 6822 points to the 7000-point round number. This also means that the potential increase of the index before the end of the year is only 2.5%.

As a seasonal period of intense volatility has basically passed, Wall Street hedge funds and institutional investors bullish on the U.S. stock market are lining up to bet that the S&P 500 index will break through 7000 points before the end of the year. This benchmark stock index surged to a record 6,890 points at the close of U.S. stocks on Tuesday, mainly due to positive signs in U.S.-China trade, strengthened expectations of interest rate cuts, and significant boosts from upward revisions of corporate earnings expectations closely related to AI.

Breaking through 7000 points is imperative, and then...

Statistics show that market bets on options for the S&P 500 index at the level of 7000 points are gathering around this integer milestone for late December to year-end, indicating that the index is expected to rise by 19% throughout 2025. However, there is only a 2.5% potential upside from Thursday's closing level of 6822.34 points, with a full two months remaining until the end of the year.

As shown in the above chart, call options for the S&P 500 expiring on December 19 are gathering around 7000 points.

Although top investment institutions on Wall Street remain generally bullish on the outlook for U.S. stocks, there are also valid reasons to maintain a cautious sentiment. Federal Reserve Chairman Jerome Powell stated that a third interest rate cut is far from certain, and while the performance of tech giants has generally exceeded market expectations, it has raised concerns among investors about the potentially disappointing returns from massive spending on artificial intelligence.

There are signs that the pace of U.S. economic growth is slowing, and cracks are appearing in high-risk assets in the credit market, raising doubts among U.S. stock investors about the health of American consumers and the strength of credit support. Additionally, a very small number of tech giants' stocks, including Nvidia, Google, and Microsoft, have contributed the vast majority of the S&P 500 index's gains. If any of these heavyweight stocks experience a sharp decline, it could create a concerning "bear market-like atmosphere."

Since 2023, the unprecedented AI investment boom has driven a long-term bull narrative in AI computing power, which is core to the logic of the S&P 500 index, heavily weighted by the "seven major tech giants," and the MSCI global stock market benchmark index, which has increasingly risen The so-called "Magnificent Seven," which occupy a high weight (about 35%) in the S&P 500 Index and the Nasdaq 100 Index, includes: Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Facebook's parent company Meta Platforms. They are the core driving force behind the S&P 500 Index's repeated record highs and are regarded by top investment institutions on Wall Street as the most capable combination to bring substantial returns to investors against the backdrop of the largest technological transformation since the internet era.

A Very Popular Psychological Barrier

Some seasoned strategists on Wall Street have begun to reduce bullish positions following Powell's hawkish remarks on Wednesday, Eastern Time—despite the last two months of the year typically exhibiting seasonal strength in indices. However, there is a more straightforward explanation for why bets are concentrated around the relatively bullish level of 7000 points in the S&P 500 Index: investors tend to tacitly place options bets near large round numbers, which possess an indescribable "magnetic attraction."

"The 7000-point strike is a very popular psychological barrier among the global investor community," said Joseph Ferrara, an investment strategist at Gateway Investment Advisors. In options terminology, the strike price refers to the level at which options traders can buy or sell the underlying asset on the expiration date.

"Round-number strike prices naturally attract more bullish attention," said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.

Additionally, due to the complexity and variability of the derivatives options market, there are more obscure reasons at play. One of them is a stock financing trade known as a "box spread," which often uses index options. Murphy attributed about half of the open interest at the 7000-point level to such "financing plays."

However, the so-called "whale trades" selling call options are also involved, particularly from the asset management division of JP Morgan, which has a large number of funds employing call-selling strategies.

Regardless of the specific reasons, Murphy suggests that investors who have missed out on much of the significant gains from "AI super stocks" consider using single-stock options rather than betting on broader indices. He stated that for investment managers who are at a relative disadvantage in terms of annual fund performance and need to capitalize on the AI-driven bull market propelled by retail investors during the index's upward movement, buying call options on individual stocks is more efficient than index options.

"The overall explosive power of the S&P 500 Index is not as strong as that of individual stocks," Murphy said. "In short, retail investors are almost 'fully loaded' in the AI frenzy, while institutional investors remain cautious and skeptical about this wave of AI-driven significant gains. Therefore, for these institutional investors, buying call options on the 'Magnificent Seven' (Mag7) is almost a self-evident choice ”