FOMO-Driven Call Buying Soars as Traders Chase S&P 500’s Furious Run

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(Bloomberg) — Traders keen to seize on further gains after the S&P 500 Index hit its first record since February are betting on stock-market darlings that they expect will surpass the index’s ascent.

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The signals from derivatives trading are clear, strategists said, as investors last week aggressively bought call options — a wager that an asset’s price will keep increasing. Among the highlights: a rush into Nvidia Corp. on Wednesday that pushed the volume of call contracts on the stock to almost triple that of bearish puts, the biggest gap since January; a jump to a four-month high in the call-put ratio on the Financial Select Sector SPDR Fund; and a drop to a two-month low in the cost of hedging against a selloff in Meta Platforms Inc.

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To Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, the risk-on behavior has been fueled by a growing fear of missing out on a rally that seems impervious to strife in the Middle East and concern that the US economy and corporate earnings growth are slowing. In addition to Nvidia, he said there was strong call buying last week in momentum names like Uber Technologies Inc., Tesla Inc. and Robinhood Markets Inc.

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The “week’s options flow reflects clear signs of FOMO-driven re-risking,” Murphy said. “The trend is clear, with almost exclusively bullish flow, momentum call buying, as well as buy-the-dip put selling.”

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Optimism that the US is moving closer to reaching concrete deals with its major trading partners drove stocks to a record. The demand to seek protection for a decline in the largest fund tracking the S&P 500 has decreased rapidly in the past week, a move that typically implies building euphoria.

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At the same time, traders are also confronting mixed signals. On Friday, US stocks nosedived in afternoon trading after Trump said he was ending all trade talks with Canada and threatened to impose a fresh tariff rate within the next week. They eventually recouped the losses and closed at an all-time high.

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Earlier on Friday, Bank of America Corp. strategists warned of the increasing risk of a speculative stock-market bubble as traders drive massive flows into equities on expectations of US interest-rate cuts. The upcoming earnings season could also test the foundation of the recent rally, especially with lackluster forecasts piling in. 

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In a macro environment as uncertain as the current one, the possibility of more setbacks, like the souring of negotiations with Canada, are also immensely higher. It is also why Susquehanna’s Murphy said using call options is a preferred way for investors to chase speculative rallies. 

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It allows them to limit the size of their losses and positions them to benefit from any gains. Calls give traders the right to buy a stock at a future higher price, but does not obligate them to, which means if the bet fails, the most they lose is the premium they paid for that right.  

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FOMO Rush

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There is further evidence that traders are crowding into the riskiest stocks seeking the sharpest upside so they don’t miss out on further gains. The Invesco S&P 500 High Beta ETF, which tracks highly volatile stocks, is on track for its best quarter since 2020 relative to the Invesco S&P 500 Low Volatility ETF. A Goldman basket of most-shorted stocks is on pace for the best monthly gain since February 2024. Retail investors are diving into equities, according to data from JPMorgan, which is often a sign of risk-taking as a stock rally intensifies.