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Bullish options trading amplifies U.S. stock market

advance

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Options dealers' short gamma position may exaggerate

market

swings

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Potential for S&P 500 pullback due to expensive calls and

tech

stock valuation concerns

By Saqib Iqbal Ahmed

NEW YORK, Oct 30 (Reuters) - A wave of bullish options

trading has amplified the U.S. stock market's advance toward

another major milestone and left dealers positioned so that

market swings are likely to be exaggerated in coming days or

weeks, according to options specialists.

The S&P 500's 17% rally this year to record highs has

brought the index close to the 7,000 mark, accompanied in recent

weeks by a surge in bullish options activity.

Strong demand for call options earlier this month pushed the

one-month rolling calls-to-puts traded ratio to its most bullish

level in roughly four years, according to a Reuters analysis of

Trade Alert data.

Calls convey the right to buy stock at a set price in the

future, while holders of puts can sell at a later date.

"People really front-ran this whole move into this 7,000

area," said Brent Kochuba, founder of options analytic service

SpotGamma.

The rush into upside call options has left options dealers as

net sellers of options - a stance known as "short gamma,"

options specialists said.

Dealers generally aim to maintain market neutrality. In a

short gamma position, they typically sell stock futures during

market declines and purchase them during rallies, intensifying

price movements in both directions.

"On our trading desk we are seeing more extreme upside call

buyers, so it makes sense that the market makers of the world

would be short gamma," Chris Murphy, co-head of derivative

strategy at Susquehanna Financial Group, said.

This dynamic suggests that if the S&P 500 climbs above

7,000, the rally could receive additional momentum from options

dealers' hedging activity.

TWO WAY MARKET

However, short gamma positioning carries risks in both

directions, analysts warned.

Any decline in the benchmark index could similarly be

exacerbated by derivatives-related trading as options dealers

sell stock futures into a weakening market.

"The problem now is people own expensive calls and there's

not that fuel for the next leg higher at this moment," Kochuba

said, adding he would not be surprised to see the market pull

back from current levels.

The rush by investors into upside calls on the so-called

Magnificent Seven

of the largest and most influential technology-focused

companies has "locally peaked-out," Nomura strategist Charlie

McElligott said. The companies are Apple ( AAPL ), Amazon ( AMZN )

, Alphabet, Meta Platforms ( META ), Microsoft ( MSFT )

, Nvidia ( NVDA ) and Tesla.

McElligott sees a "window for a 3% to 5% pullback" in U.S.

stock indexes in the next few weeks, he said in a note on

Thursday.

On Thursday, the S&P 500 and the Nasdaq lost ground as Meta and

Microsoft ( MSFT ) slid on concerns of surging artificial intelligence

spending, adding to concerns about the pace of monetary policy

easing from the U.S. Federal Reserve.