Options trading on US exchanges at one point last week showed the biggest bias toward calls in 14 months. Read more.
“There’s always going to be a wall of worry, but the stock market historically sees better times ahead before the economy does,” Quincy Krosby, chief global strategist at LPL Financial Holdings Inc., said. “If we see more interest in small caps and financials, it will be a telling sign that investors are more comfortable about where the economy is headed.”
They’re likely doing that while simultaneously selling the underlying securities, according to Brian Donlin, head of equity derivatives strategy at Stifel Nicolaus & Co. That frees up cash while still allowing them to benefit from the rally.Article content This approach, known as a stock-replacement trade, has contributed to a breakout in the volume of call options, which at one point last week made up 60 per cent of the total volume of puts and calls traded on U.S. exchanges on everything from individual stocks to benchmark indexes. That was the most since April last year, data compiled by Bloomberg shows.
The move to reduce risk in portfolios while maintaining a targeted equity exposure is easy to understand with concern swirling that the S&P 500’s 20 per cent advance from its October low — meeting the definition of a bull market — could leave the gauge overextended.Article content
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