NEW YORK – Wall Street is feeling uneasy as concerns about an options-driven momentum trade continue to grow. This trade has been a key factor in driving the S&P 500 index into record territory. Analysts are particularly focused on Nvidia Corp.’s upcoming earnings report, which they warn could be a potential catalyst for reversing the market’s rally over the past four months.
The surge in demand for bullish call options, reaching its highest level in years, has raised red flags among experts. They warn that the excessive focus on risky options bets could lead to a significant market reversal, even if Nvidia’s earnings meet Wall Street’s expectations.
Analysts expect Nvidia to report a staggering increase in earnings per share of $4.59, up more than 700% from the same quarter last year. This growth has only added to the mounting concerns about the options market’s influence on stock prices, especially for heavily weighted companies like Nvidia.
As stocks have rallied over the past year, investors have increasingly turned to options to chase market highs and boost returns. This trend has led to an intensified demand for bullish out-of-the-money calls on major U.S. stocks, reminiscent of the 2021 meme-stock frenzy.
Market experts note that while option buyers typically act as insurance buyers, there has been a shift towards more speculative trading. This shift is evident in the unusual demand for out-of-the-money calls, particularly for stocks with significant weight in major market indexes.
When it comes to Nvidia, its earnings report is seen as a make-or-break moment for the market. With the stock already up nearly 50% this year, Nvidia’s performance is expected to have a substantial impact on the broader market.
Stock market analysts believe that implied volatility across the options market is likely to decline after Nvidia’s earnings report, leading to cheaper options and potential selling pressure for heavily bet on stocks. Analysts are closely monitoring whether Nvidia’s performance will trigger a market reversal in the wake of increased options trading.
Despite concerns about the role of the options market in driving stock prices higher, the broader market is showing signs of vulnerability. Stocks are trading at their richest levels relative to expected earnings, raising questions about the sustainability of the market’s momentum. The market’s forward price-to-earnings ratios for major indexes have surpassed historical averages, underscoring the increasingly risky nature of the market’s current trajectory.
As the market faces uncertainties surrounding Nvidia’s earnings and the implications for the broader market, investors are bracing for potential shifts in momentum and the impact on stock prices. The coming week’s calendar of potentially market-moving events is light, with the release of minutes from the Fed’s January meeting being the main focal point for investors.