Concerns are mounting on Wall Street regarding a momentum-driven trade fueled by options activity, a trend that has propelled the S&P 500 index to record highs.
The surge in demand for bullish call options, reaching levels not seen in years, has caught the attention of analysts, who are closely eyeing Nvidia Corp.’s upcoming earnings report. Some experts caution that this event could serve as a trigger to halt the momentum trade, potentially triggering a reversal in the market’s recent rally.
Analysts anticipate Nvidia to report earnings per share of $4.59, marking a substantial increase of over 700% compared to the same quarter last year.
In recent months, investors have increasingly turned to options as a means to capitalize on market gains, particularly in chasing stocks higher. This trend has led to a surge in demand for bullish out-of-the-money call options on major U.S. stocks, reminiscent of the meme-stock craze in 2021.
Notably, the heightened options activity has skewed the market dynamics, with investors adopting a more speculative approach rather than using options as insurance, according to market experts.
While Nvidia has emerged as a focal point of the momentum trade, other stocks have also ridden the wave. This trend has prompted concerns that the broader market could experience a downturn alongside Nvidia, as bullish call options tied to numerous major U.S. companies are expected to decline in value following the earnings report.
Following Nvidia’s earnings announcement, implied volatility across the options market is anticipated to decrease, leading to a drop in option prices. This could prompt options market makers to sell off stocks they had accumulated to hedge their positions, potentially exerting selling pressure on the market.
Names within the technology sector, particularly semiconductor companies like Advanced Micro Devices Inc. and Arm Holdings, as well as tech giants such as Microsoft Corp., have also witnessed a surge in bullish call options activity.
Despite the recent momentum-driven rally, concerns linger among some analysts regarding the sustainability of the market’s ascent. The market’s steep advance has led to elevated valuations relative to expected earnings, prompting caution among investors.
While momentum has been a driving force behind the market’s gains, timing the reversal of this momentum remains a challenge. Nevertheless, analysts warn that the pace of recent rallies may not be sustainable in the long term.
The stock market closed lower during the final trading session of the week, with the S&P 500 and Nasdaq Composite snapping five-week winning streaks. Looking ahead, next week’s calendar appears light in terms of potentially market-moving events, aside from the release of minutes from the Federal Reserve’s January meeting.
