Wall Street is abuzz with comparisons between Nvidia and dot-com-era Cisco. The stock of Lucid Motors has dropped by more than 5% as losses continue to mount for the EV startup. Bullish bets on Nvidia and other ‘Magnificent Seven’ members are nearing their most crowded levels in the past year, raising concerns among options-market experts about potential problems for the broader market.
Data from market-data firm Spotgamma indicates that risky bullish options tied to the ‘Magnificent Seven’ and other market-leading technology stocks are approaching their most crowded levels in the past year. This has led derivatives-market experts to warn of a potential pullback in the broader equities market, particularly for Big Tech stocks, which have been driving the market higher over the past year.
According to Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, the one-month and three-month call skew for Nvidia Corp. has reached the highest level since at least June. Call skew measures demand for riskier out-of-the-money calls relative to at-the-money bullish bets. The surge in call skew indicates a rising demand for riskier options compared to those that would pay off if the stock were to see a smaller advance before expiration.
Silverman, however, noted that the extreme demand for out-of-the-money calls doesn’t necessarily predict an immediate reversal in the underlying stock. She emphasized that while Nvidia is trading heavily on momentum, ‘momentum tends to beget momentum.’
Nvidia has been the best-performing stock in the S&P 500 so far in 2024, with a 46.7% increase this year following a 238% advance in 2023. Its shares were trading at $726 around midday Tuesday as the broader market experienced a decline after the release of January inflation data that exceeded economists’ expectations.
The extreme demand for bullish options not only poses potential problems for members of the ‘Magnificent Seven’ but could also impact the broader market. As the situation unfolds, market participants will be closely monitoring the implications of these crowded levels of bullish bets on the future trajectory of the market.
