While a gain of 14% for the S&P 500 and 23% for the Nasdaq in the first half of the year is impressive, big call buying in market leaders as of late leads me to believe the stock market’s rally is actually in the early innings, and there is way more upside to come this year. Let me explain what I mean …
My options trading system is focused on finding the most bullish or bearish option activity in individual stocks, and then, if the risk/reward is right, I follow into those trades with similar positions.
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For example, if hedge funds and institutions are actively buying calls in Palantir (PLTR) or Rivian (RIVN), which they have been, then I evaluate those bullish trades, the stocks’ performance, and market conditions, and if the setup is right, we buy.
Call Buying in Leaders Points to a Rising Market
And as of late, option activity has been wildly bullish in several market leaders, which is a great sign for the overall market. Here are those trades, and the big premiums these traders risked when buying these calls:
Buyer of 68,000 Tesla (TSLA) September 230 Calls for $39.75 – Stock at 256 ($270 million of calls purchased)
Buyer of 64,000 Microsoft (MSFT) August 440 Calls for $23.60 — Stock at 450 ($151 million of calls purchased)
Buyer of 28,000 Meta (META) August 500 Calls for $40 – Stock at 515 ($112 million of calls purchased)
Buyer of 5,500 Meta (META) July 500 Calls for $33 – Stock at 530 ($18 million of calls purchased)
Buyer of 4,700 Netflix (NFLX) September 640 Calls for $72.55 – Stock at 680 ($34 million of calls purchased)
Buyer of 15,000 Coinbase (COIN) August 230 Calls for $23.75 – Stock at 230 ($35 million of calls purchased)
Call buys of $270 and $151 million are not being made by my parents in Arizona. These are hedge funds and institutions putting big money to work in market leaders. This is very encouraging action.
Encouraging Signs from the Low VIX
Also of interest to me is the low level in the Chicago Board of Options Exchange Volatility Index, which is more commonly referred to as the VIX. This market signal, which is often referred to as the “Fear Index,” has been trading at historically low levels for the past several months.
And the low levels in the VIX mean that hedge funds and institutions are not actively hedging their portfolios as they see little reason to own protection against a big market decline.
This low level in the VIX is especially encouraging given the many macro concerns in the world these days (Presidential Election, Russia/Ukraine, Middle East, etc.).
Having said all that, if I want to be a contrarian, I might look at the recent call buying and say to myself, “Classic chasers buying at the top of the market,” and the low levels in the VIX and say “Of course, no one is scared, which means it’s time to be.” And that may be right. The market could easily pull back 5% and it will very quickly feel like the top is in.
That being said, other than the weak breadth under the surface of the market (which is a concern of mine), I’ve seen nothing in the options market that tells me we are headed toward a correction. And instead, given the bullish signals noted above, I think the market is headed much higher in the second half of the year.
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