Investors continue to bet that US stocks have room to rise, according to a key measure of positions in the derivatives market, even as the blue-chip S&P 500 index sets a series of record highs.
Purchases of call options, which confer the right to buy a stock at an agreed price, have surged since November’s US election and Covid-19 vaccine breakthroughs, according to exchange operator Cboe. The daily trading volumes of call contracts, which are effectively a bet on rising prices, have far outpaced put options, which give the buyer a right to sell shares at a set level.
The put/call ratio is just the latest indication of enthusiasm for stocks, despite the continuing rise in coronavirus cases and major cities turning again to lockdowns, investors and analysts have said.
The ratio “is a sign of excess enthusiasm,” said Chris Murphy, co-head of derivative strategy at Susquehanna International Group. “Can the enthusiasm last for six or 12 months? Sure. Can it be a sign of a future pullback being near? That is harder to tell.”
The daily ratio of put options to call options traded on US markets — across single stocks, indices and equity-focused exchange traded funds — fell to its lowest level since 2012 this month at 0.46. That compares with an average of 0.87 over the past decade.
The uptick in calls has been helped by their heavy use among a new generation of retail traders betting on a stock market that they believe can “only go up”.
Analysts have raised concerns over the consistently bullish tone in markets. A Bank of America survey this month showed money managers had cut their cash holdings as they continued to bet on equities. Recent first-day pops in share prices following initial public offerings from the likes of DoorDash and Airbnb have also drawn comparisons with the dotcom market boom and bust.
But meagre yields on sovereign bonds — driven lower by the Federal Reserve’s measures earlier this year to ease monetary policy — are leaving investors with little alternative, said Mr Murphy. “That is a big part of why stock markets have been resilient,” he said.