U.S. Options Setup May Signal Risks for Stocks, Tallbacken Says

A lack of demand for bearish options on the U.S. stock market signals potentially troubling investor complacency amid a record-breaking equity rally, according to Tallbacken Capital Advisors LLC.

Total open interest in put options on the S&P 500 index is around a four-year low, according to data compiled by Bloomberg. Options premiums are also “expensive,” possibly contributing to a further drop in open interest, Tallbacken Chief Executive Officer Michael Purves wrote in a note.

“Ultimately, this sets up a complacency situation which will exacerbate market vulnerability,” he said. “But not just yet.”

U.S. Options Setup May Signal Risks for Stocks, Tallbacken Says

Equity gauges from the U.S. to Asia scaled all-time highs this week amid optimism about a recovery from the pandemic, aided by stimulus and vaccines.

Signs of froth abound -- for instance, investors who trade the smallest number of options at a time amassed record bullish contracts last week, according to Sundial Capital Research Inc. At the same time, the Cboe Volatility Index -- the S&P 500’s so-called “fear gauge” -- is still elevated compared its longer term averages.

Some strategists have cautioned about the risk that any stock selloff could be exacerbated by a turbulent unwinding of one-sided, upbeat bets.

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