Options Traders Have Never Been More Bullish

With speculative positioning in VIX futures at record shorts (most bullish), and speculative longs in Dow and Nasdaq at or near record highs, we have one more "most hated rally" statistic to add to the pile of exuberance. The open interest in S&P 500 ETF (SPY) call options has never been higher as the last few days panic-buying leveraged long positions lifted exposure above summer 2011 highs...

The last time SPY call option open interest was this high, S&P 500 tumbled 20% in 2 months amid the US downgrade...The level of bullish bets that the SPDR S&P 500 exchange-traded fund will rise reached a record this month and hit the highest level since January relative to bearish options.

 

Of course - nothing matters so why not just keeping buying...

 

Even as The Fed warns of excessive valuation...

... during the discussion, several participants commented on a few developments, including potential overvaluation in the market for CRE, the elevated level of equity values relative to expected earnings, and the incentives for investors to reach for yield in an environment of continued low interest rates.

Bear in mind that speculative bullish positions all added this week with VIX shorts and Dow longs now at all-time-record highs.. and Nasdaq longs soaring...

 

Given all of that, we think it is worth remembering JPMorgan's quant guru Kolanovic's recent conclusion:

As this collapse in realized volatility is not a fundamental change in volatility regime, we expect realized volatility to increase (this increase in market volatility is shaping to be a consensus view, as indicated by steep contango of VIX futures). Option exposures that are pressuring volatility should roll-off, and investors should increase leverage and set protection closer to the current market level. This will set the stage for a more rapid increase in volatility. We have seen these switches between extreme low and high volatility that manifest themselves as high volatility of volatility (e.g., note that that the current “once in 10,000 year” market calmness came after a Brexit day move that was “a once in 50,000 year” move for EuroStoxx 50 index).

Put another way - this can't end well...

Whether central banks will respond with even more of the same to this upcoming "increase in volatility", remains to be seen.