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Options  | February 19, 2020

Trading in U.S. stock options has by at least one metric reached a level of bullishness not seen since the height of the dot-com boom.

Investors bought to open almost 24 million call options last week, more than ever before, Sundial Capital’s Jason Goepfert wrote in a note Saturday. At the same time, selling of calls to close dropped nearly 30% from its level a couple of weeks ago, he said, attributing that to investors’ desire not to miss out on any gains. That puts the difference between the two at a record high.

“We’re seeing a level of leveraged speculation right now” that “only has the early 2000s as a precedent,” Goepfert wrote in a note.

In the past 20 years, any time calls bought to open minus calls sold to close hit 10 million, stocks struggled in the months that followed, he said. There have been six such signals since mid-December, according to an analysis of Options Clearing Corp. data by Sundial’s SentimenTrader -- too recent for much historical analysis. But there were also four instances between 2000 and 2018, and on those, stocks fell a median 4% two months later.

“Whatever shorter-term gains the speculators enjoyed were more than wiped away,” Goepfert said.

He isn’t alone in his concerns. Btig LLC strategist Julian Emanuel wrote in a note Sunday that “a quiet sort of complacency seems to have descended over investors, weary of the last several weeks’ gyrations,” partially because “the bears have capitulated -- with short-term contrarian measures such as put/call ratios and short interest indicating that the desire to ‘fight’ the market’s strength has all but disappeared.”

Of course, this market has had its skeptics for months, and even years. Only a handful of Wall Street strategists predicted the S&P 500 Index’s 29% rally in 2019 with any degree of accuracy, while most were left in the dust. The gauge, has climbed about 4.5% this year to 3,374, and is close to their median 3,400 estimate for all of 2020.

But this option activity, building on what Goepfert said last month was a situation that “keeps getting crazier,” does seem like a particularly notable phase.

“No other seven-week stretch has come even close to this level of speculative action,” Goepfert said. “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 of months, which only got worse in the months after that.”

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