The 'spot up, vol up' dynamic is back
Stocks are charging higher, and options traders are piling into bullish call options to give chase.
Stocks have shot higher over the past four trading sessions, and investors who are worried about missing out are piling into bullish options bets just to try to keep up.
In doing so, they're adding fuel to the fire. The latest reports of a ceasefire between the U.S. and Iran have sent traders scrambling back into bullish call options. Meanwhile, the bearish puts that they had been stocking up on over the past few weeks were getting absolutely crushed, according to Charlie McElligott, a cross-asset strategist at Nomura.
As a result, investors were seeing an unusual pattern emerge: The Cboe Volatility Index VIX, better known as the VIX or Wall Street's "fear gauge," was rising alongside the S&P 500 SPX. Typically, the two indexes are inversely correlated. The VIX uses options-trading volume to measure how volatile investors expect stocks will be over the next month or so. Volatility rises more quickly when stocks are falling.
But both put in strong showings on Tuesday. The S&P 500 gained 1.8%, its biggest one-day percentage-point gain since April 8, Dow Jones Market Data showed. Meanwhile, the VIX rose 2.9% to 16.47.
McElligott said the rising VIX was a sign that investors were "chasing back" into the market via options now that shares of the hyperscalers - the handful of megacap companies driving much of the artificial-intelligence buildout, including Alphabet, Meta, Amazon and Microsoft - are moving meaningfully higher once again.
That has helped contribute to the return of the "spot up, vol up" dynamic, which tends to emerge during key moments for the market. Investors saw this briefly during the second quarter, as the rally in semiconductor stocks went parabolic. It also briefly emerged last fall, as investors rotated away from tech and into stocks that had been lagging behind.
During the second quarter, investors shifted out of shares of hyperscalers and the rest of the Magnificent Seven group of megacap tech stocks. Sophisticated hedge funds used them as funding shorts to amplify their bets on highflying semiconductor names, power stocks and shares of other companies cashing in on the massive AI buildout, McElligott said.
Over the past month, that trade has slammed into reverse, with semiconductor stocks selling off, and shares of the biggest U.S. tech companies rallying once again. This has helped convince investors that the index now has the all-clear to move higher, given these stocks' tremendous influence over the direction of the S&P 500, he added.
Perhaps as a result, moves in the U.S. market over the past few days have been coming fast and furious. A team of strategists at Bespoke Investment Group pointed out that the Nasdaq composite COMP on Tuesday was on track to tally its fourth straight daily gain of 1% or more - something that has only happened 18 times in the history of the index.
Seeing the VIX and the S&P 500 rise at the same time can be a meaningful signal for the market if it persists, according to Jordan Rizzuto, chief investment officer at GammaRoad Capital Partners.
"If we started to see several months running where the VIX was elevated, or was rising alongside the market, that's where we could get into a longer-term inflection point in the market, like the late 1990s, or 2007," Rizzuto told MarketWatch.
Aggressive call buying can feed into a self-reinforcing dynamic, as options dealers buy more stocks to offset their exposure to the bullish contracts they have sold to their clients.
That can lead to these "very compressed" moves higher, he added.
"These types of sharp moves can drive both call and put demand higher," Rizzuto said.
U.S. stocks finished higher on Tuesday, with the S&P 500 tallying its first record closing high since early June and capping off its strongest four-day percentage-point gain since April 2025, Dow Jones Market Data showed.
The Dow Jones Industrial Average DJIA also finished in record territory, while the Nasdaq had yet to claw back all of its losses from the prior six weeks.
-Joseph Adinolfi
