AP Photo/Richard Drew
- By one measure, options markets are at record-levels of bullishness.
- A note from Sundial Capital’s Jason Goepfert says that periods like this precede market downturn, Bloomberg previously reported.
- Visit Business Insider’s homepage for more stories.
Options markets are so optimistic, they look like they did during the tech bubble of the early 2000s.
That’s according to Sundial Capital’s Jason Goepfert, who wrote in a Saturday note that the “level of leveraged speculation right now” only finds comparison in the dot-com bubble, Bloomberg previously reported.
Last week, buying of calls to open hit 24 million, the highest level ever, while investors sold to close 30% fewer calls than weeks prior, according to Goepfert’s note, seen by Bloomberg.Â
Bought calls to open signify that traders have begun a new position; sold calls to close show that traders are exiting a position.
Bloomberg reported the difference between bought calls to open and sold calls to close is the largest it has ever been – a sign that contrarians may be dwindling amid strong bullish sentiment.
That difference is usually an omen of turbulence ahead for stocks, Goepfert’s note said. The four times there has been a difference of 10 million between calls bought to open and calls sold to close, stocks typically fell a median of 4% within the following couple months.Â
To be sure, bearish calls predicting the demise of the longest-ever bull market are nothing new – few on Wall Street anticipated the S&P 500 index could run up 29% in 2019, Bloomberg reported.
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But this optimism may too be exceptional. The options market has shown such a gap six times since mid-December, reported Bloomberg, citing research by Sundial’s SentimenTrader using Options Clearing Corp. data.Â
“No other seven-week stretch has come even close to this level of speculative action,” Goepfert’s note read. “The only one that comes close ended in mid-February 2011, preceding a more than 6% loss in the S&P 500 over the next couple months, which only got worse in the months after that.”Â
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