Options traders are displaying a slightly more cautious stance amid a recent slowdown in the rally of U.S. stocks.
Charlie McElligott, a derivatives strategist at Nomura, observed a rise in demand for bearish put options relative to bullish calls linked to the S&P 500 index over the past few weeks. This shift has caused a metric known as “skew” to increase from historically flat levels. Skew measures the demand for put options compared to call options or the demand for out-of-the-money calls or puts versus contracts trading closer to the money.
McElligott noted that while this increase in skew is modest, it has elevated the skew on S&P 500 index options from its flattest level on record to the 6th percentile relative to historical data. Typically, puts trade at a premium to calls, reflecting the expectation that volatility rises more rapidly during stock declines than during rallies. Puts grant the holder the right, but not the obligation, to sell the underlying asset at a predetermined price by a specified date, while calls provide the right to buy.
However, this year has seen a challenge to conventional wisdom, as data from Cboe Global Markets indicates that stocks have exhibited greater volatility on up days than on down days. Consequently, McElligott observed an increase in purchases of index hedges as market unease grew.
Spotgamma, a firm specializing in data and analytics on the U.S. equity options market, confirmed a similar trend in options related to individual stocks and popular index-tracking exchange-traded funds (ETFs). Founder Brent Kochuba noted a shift from heavy call skews observed a month ago across various sectors, including technology, major ETFs (such as SPY, QQQ, IWM), Mag 7, software, semiconductors, and cryptocurrencies.
Kochuba’s mention of tickers refers to several popular exchange-traded funds (ETFs) and a group of megacap technology stocks. The SPDR S&P 500 Trust ETF (SPY) tracks the S&P 500 index, the Invesco QQQ Trust Series 1 (QQQ) tracks the Nasdaq-100 index, and the iShares Russell 2000 ETF (IWM) tracks the small-cap Russell 2000 index. The “Magnificent Seven” refers to a group of seven megacap technology stocks that led much of the S&P 500’s gains in the previous year. These stocks include Nvidia Corp. (NVDA), Microsoft Corp. (MSFT), Apple Inc. (AAPL), Meta Platforms Inc. (formerly Facebook, ticker: FB), Amazon.com Inc. (AMZN), Tesla Inc. (TSLA), and Alphabet Inc. (GOOGL).
Options tied to semiconductor stocks and ETFs have recently seen a normalization in their skew following Nvidia’s event where it unveiled its new Blackwell chip. Kochuba noted that semiconductor stocks were the last sector to maintain high call skew, which is now flattening.
The options market is increasingly influencing the traditional cash market for stocks, with options trading volume reaching record levels this year, according to data from Options Clearing Corp. Data from derivatives strategists at Goldman Sachs Group indicates that options volume tied to individual shares is expected to surpass cash trading volume for the first time since 2021 in March.
While U.S. stocks have experienced a slowdown in their upward trajectory recently, with both the S&P 500 and Nasdaq Composite logging back-to-back weekly losses for the first time in nearly five months, they have since rebounded. Investors are eagerly awaiting comments from Federal Reserve Chairman Jerome Powell on Wednesday, particularly regarding the recent increase in inflationary pressures, which has raised concerns that the Fed might adjust its plans for interest-rate cuts later this year.