S&P 500 call demand hits 2016 high as FOMO grips rally

Call-option demand across the S&P 500 has surged to its highest since 2016 as investors chase a record-breaking rally.

The S&P 500 rose 0.7% to a record Thursday, extending a 23% advance since March as call-option demand hit its highest since 2016.

"Demand for upside has accelerated toward record levels," said Scott Rubner, head of equity and equity derivatives strategy at Citadel Securities, in a client note.

At least 170 S&P 500 constituents show demand for upside calls outstripping demand for options on markets staying flat by the most since at least 2016, according to Citadel Securities data. The buying reflects what Steve Sosnick, chief strategist at Interactive Brokers, calls "FOMO insurance" — institutions hedging against missing the rally without fully committing capital. "If there's an institutional investor who may not want to chase these stocks at what they perceive to be high valuations and stretched momentum, but don't want to miss the rally, they're incentivized to buy calls," he said.

The options frenzy follows the strongest quarterly earnings growth since the pandemic recovery in 2021, prompting long-time bull Ed Yardeni to raise his S&P 500 forecast. Yet the euphoria sits against a backdrop of record-low volatility — the Cboe VIX fell to its lowest since January, and the VIX equal-weight index hit its lowest since March 17 — even as one institutional investor spent $23.4 million on put options betting on a 38% decline by Dec. 18.

FOMO Insurance Drives the Options Bid

The surge in bullish options reflects a shift in how institutions express conviction. Rather than buying shares outright at stretched valuations, money managers are paying up for upside calls that capture gains while limiting capital at risk. The pattern marks a break from the typical market structure, where demand for flat-market options usually dominates.

Volatility at Year Lows Opens a Hedging Window

The Cboe VIX fell to its lowest since January, and the VIX equal-weight index dropped to its lowest since March 17, cutting the cost of downside protection. The iPath Series B S&P 500 VIX Mid-Term Futures ETN has fallen 14 percent over the past year, reflecting the persistent calm. Sosnick drew a weather analogy: "If it's the dry season, nobody wants to buy an umbrella. But that may be exactly the best time to buy one."

Not everyone reads the call-option bid as froth. Christopher Jacobson, co-head of derivatives strategy at Susquehanna International Group, said the premium is justified by realized moves. "You're seeing calls get bid up, but it's being justified by the realized moves that we are seeing at the single stock and at an index level," he said.

The rally has been supported by falling oil prices and signs of easing US inflation, which led traders to dial back bets on Federal Reserve rate hikes. The S&P 500 closed at 7,798.99 on Thursday, according to exchange data.

The divergence between record call demand and record-low volatility sets up a test for the market. If the rally extends, the options bid will prove prescient; if it stalls, the crowded bullish positioning leaves little room for error — and the $23.4 million put purchase suggests at least one investor is already preparing for that scenario.

This article is for informational purposes only and does not constitute investment advice.