Options traders are signaling an increasing degree of caution as the recent US stock market rally encounters some turbulence. Data from Nomura derivatives strategist Charlie McElligott reveals a rising demand for bearish put options in relation to bullish calls tied to the S&P 500 index. This trend suggests a slightly elevated level of concern among traders about a potential market sell-off.
This shift, while modest, has nudged a key metric called “skew”– a measurement of put option demand relative to call options – off historic flat levels. As a seasoned market analyst at a multinational bank observes, “This shift in ‘skew’ isn’t indicative of widespread panic, but rather a healthy dose of prudence re-entering the market after a period of exuberance.”
Understanding Skew
In options trading, skew monitors the relative demand for put options (a bearish bet on the market) versus call options (a bullish bet) and for out-of-the-money contracts vs. at-the-money contracts. Typically, puts trade at a premium to calls due to the tendency of markets to fall quickly and rise steadily. A flattening skew signals growing bullishness among traders.
The recent uptick in skew, however, highlights a subtle shift in sentiment among investors. “We’re observing index hedges being bought in recent sessions, responding to this increasing unease in the market”, comments an experienced institutional derivatives trader.
Shifting Sentiment Across Sectors and ETFs
Data from Spotgamma, an options analytics firm, indicates a similar shift across options tied to individual stocks and popular exchange-traded funds (ETFs). “The heavy call skews that dominated the tech sector a month ago, encompassing major ETFs like SPY, QQQ, and IWM, along with software, semiconductors, and even crypto-linked stocks, are starting to normalize”, notes Brent Kochuba, Spotgamma’s founder.
Notably, the recent Nvidia event showcasing its new Blackwell chip has sparked a normalization of options tied to popular semiconductor stocks and ETFs. “Semi stocks were the last bastion of high call skews, and now we’re seeing that bullishness dissipate”, Kochuba adds.
Options Influence Spills into the ‘Cash Market’
The options market appears to have a growing influence on the ‘cash market’ (where shares are exchanged). Options trading volume is surging to record levels this year, according to the Options Clearing Corporation. Recent Goldman Sachs data even suggests trading volume in options tied to single stocks may outpace traditional cash trading for the first time since 2021.
Market Focus: Inflation and the Fed
The US stock market rally has lost some steam, with the S&P 500 and Nasdaq Composite both posting recent back-to-back weekly losses. Both indexes have experienced some recovery, however, demonstrating the market’s ongoing attempt to find its footing.
All eyes are on Federal Reserve Chairman Jerome Powell’s speech on Wednesday for clues about the Fed’s stance on interest rates. Recent signs of resurgent inflation might force Powell to dial back expectations of rate cuts later in the year. A well-respected economist at a leading policy institute remarks, “Investors are likely to remain in a holding pattern until they gain clarity on the interplay between inflation and the Fed’s subsequent monetary policy decisions.”
