Bets on Stock Rally Explode After an Odd Year in Options Trading

Hedging against the unknown has always been the main objective in the options market. One risk traders are increasingly aware of is missing out on the potential rally in equities in 2023.

The diverging performance implied that investors were willing to pay an extra amount for bullish options, causing a rise in the relative costs of calls versus puts, a relationship known as skew. With stocks limping into 2023 and the Federal Reserve expected to keep rates elevated, investors anticipating market turmoil are indeed paying up for options that capture upside if a rally breaks out, the analysis by Susquehanna showed.

The current pivot toward bullish options on the S&P 500 Index means investors can actually take advantage of the inflated pricing by selling calls to fund protective puts, according to Christopher Jacobson, a strategist at Susquehanna.

"While the current option implied likelihoods of various moves lower over the course of the year are pretty similar to how the same percentage moves looked at this time last year, the upside of the distribution is notably different now versus then," Jacobson wrote in a note Tuesday.