Traders Pay Through the Nose to Bet the S&P 500 Will Climb

Updated on
  • Measure known as skew hits record low, indicating bullishness
  • Average put-to-call ratio is near the lowest since last March
Barbara Reinhard, Voya Investment Management head of asset allocation, says the equity market rally has legs.

If you want to bet that the S&P 500 will march even higher, be prepared to fork out a sizable sum. A record number of investors are happily paying up.

As U.S. stocks trade at all-time highs, the price tag on bearish options has dropped to a trough relative to bullish contracts. The spread between the price of one-month, 25-delta puts and calls for the S&P 500 is roughly two standard deviations below its five-year mean, data compiled by Bloomberg show. It’s an indication of the greed -- or lack of fear -- in the market suppressing the Cboe’s volatility gauge. 

The persistent decline in put prices -- paying less for downside protection -- drove the downtrend in the measure known as skew during most of last year’s second half. Since Jan. 3, investors chasing upside have led to an increase in the cost of calls, contributing to the historically significant level of bullish positions, the data show.

Even contracts offering minuscule upside have surged: January 2,750 calls closed at more than $33 on Tuesday, up from 55 cents on Dec. 29.

More than 5.4 million S&P 500 calls have already changed hands in 2018, the most on record to kick off the new year. The average ratio of bearish-to-bullish options volume over the past 25 days is near the lowest since last March.

— With assistance by Sid Verma

(Updates with January call price surge in fourth paragraph.)
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