Options traders fading big moves in both directions, says Cboe's Mandy Xu
Speakers
Summary
- Options market activity over the past week shows traders consistently "fading" (betting against) large daily moves in both directions—selling hedges on sell-offs and taking profits on rallies.
- In oil (WTI) options, there is "remarkably consistent" strong demand for calls over puts, positioning for further upside. This skew is evident even in longer-dated (6-month) options, which is extremely rare.
- This extreme call skew in oil has only occurred three times in 20 years (2008, 2011, 2022), and each instance preceded a prolonged period of elevated oil prices.
- The options market implies the current oil supply disruption is expected to be "rather prolonged."
- In equities, there is still a strong belief in a "Trump put" (expectation of a policy reversal to cushion severe sell-offs), leading to bullish call buying during declines.
- Volatility in tech/AI names (e.g., QQQ) has collapsed relative to the S&P 500 (SPX), falling from a 1-year high in February to a near 1-year low as investor focus shifts from the AI trade to macro/geopolitical risks.
- This shift has increased stock correlation, with sectors now trading more in sync based on macro outlooks (inflation, growth) rather than AI-specific dispersion.
- The common put/call ratio is considered a less reliable indicator because it doesn't reveal trade direction (buying vs. selling).
Trade Ideas
The speaker states oil options positioning shows "very, very strong" call demand relative to put demand, a trend that is "remarkably consistent." This skew is present even in 6-month options, where calls trade at a premium to puts—an "extremely rare" event that has only happened three times in 20 years (2008, 2011, 2022). Each of the three prior instances was associated with a major supply disruption (2008 price spike, 2011 Arab Spring, 2022 Russia-Ukraine war) and led to oil spending "considerable amount of time being very, very elevated." The options market structure is signaling that the current disruption is "likely to be rather prolonged," suggesting a sustained upside risk environment for oil prices. A swift geopolitical resolution or a unexpected surge in supply that negates the disruption narrative.
The speaker observes that the volatility of tech/AI names (using QQQ as a proxy) relative to the S&P 500 (SPX) has collapsed from a one-year high in February to a near one-year low since the onset of the Israel-Hamas war. This collapse indicates investor focus has shifted away from the concentrated "AI trade" and its associated stock-picking dispersion towards macro/geopolitical risks, causing stocks to trade more in correlation with broad market sectors. The dramatic compression in relative volatility suggests the previous high-conviction, thematic-driven risk in tech has dissipated for now, replaced by macro-driven trading. This implies a neutral, watchful stance as the sector loses its standalone momentum driver. A resurgence of AI-specific catalysts or news that refocuses investor attention back to stock-specific dispersion within the tech sector.
