Not afraid of the downturn, only afraid of missing out! The S&P 500 hits a new high, and "FOMO insurance" ignites a surge in bullish option buying.

As U.S. stocks continue to climb to historic highs, investors growing worries are not about a sudden market downturn but rather about missing out on the rally. As of Thursdays close, the S&P 500 index rose 0.7%, hitting a new record high, and has gained about 23% since the end of March. The decline in oil prices and signs of easing inflation pressures in the U.S. have led traders to lower their bets on further interest rate hikes from the Federal Reserve, providing support for the stock market. At the same time, U.S. companies just announced their strongest quarterly profit growth since the pandemic hit in 2021. Traders are starting to bet on the continuation of the upward trend, with long-term bulls and strategists like Ed Yardeni raising their S&P 500 index targets. This sentiment is echoed in the options marketinvestors are reducing their positions in downside protection and are instead focusing on buying contracts that can profit if the market continues to rise. According to Citadel Securities, demand for call options on at least 170 S&P 500 component stocks has exceeded demand for at-the-money options, marking the largest deviation since 2016. This breaks from previous trading norms. Scott Rubner, the equity and equity derivatives strategy head at Citadel Securities, wrote in a client report: "Demand for upside options has accelerated to near-record levels." Interactive Brokers' chief strategist Steve Sosnick referred to this phenomenon as FOMO insurance. He explained that institutional investors might believe some popular stocks are overvalued and their momentum excessive, making them reluctant to chase prices higher directly, but they still do not want to miss out on further gains. Thus, they are motivated to purchase call options to gain upside exposure with less capital at risk. However, some analysts believe this still signals that the stock market's upward trend may continue. Christopher Jacobson, co-head of derivatives strategy at Susquehanna International Group, noted that the surge in call options is not purely speculative: The volatility realized at both the individual stock and index levels is providing justification for this demand. Risks have not disappeared, and complacency raises caution. While demand for call options is heating up, overall volatility indicators remain unusually calm. As investors rush into this FOMO-driven rally, Wall Street's "fear gauge" has dropped to its lowest level since January. On Thursday, although the Cboe Volatility Index (VIX) edged up slightly, it created a rare combination with the S&P 500 index hitting a new high (this unusual dynamic suggests that the current rapid ascent in the stock market may be excessive), the index had previously dipped to a low of 14.39, the lowest since early January. The equal-weighted VIX index has also reached its lowest level since March 17. The Cboe Skew index, which measures demand for crash insurance, hit a year-to-date low on August 4, indicating that the cost of hedging against a stock market downturn is relatively low. The calm sentiment has even spread overseas. The South Korean Kospi 200 volatility index has dropped over 34% this month, reaching its lowest level since April 30. On the surface, the market has reasons to be optimistic, especially after Wall Street just went through another impressive earnings season. Analysts have continuously improved profit expectations for the remainder of 2026 and beyond. FactSet data shows that the pace of upward revisions in earnings expectations has even exceeded the rise in stock prices at the index level. Yet the risk factors have not vanished. Ongoing conflicts with Iran continue to weigh on the global economic outlook; concerns about the Federal Reserve's independence, along with whether massive AI investments can deliver the expected returns, remain persistent worries. Michael Kramer, a portfolio manager at Mott Capital Management, also pointed out that the recent rise in global bond yields has increased the risks for the stock market. Kramer added that certain technical indicators also suggest that volatility may soon rise again. As the stock market has climbed over the past two weeks, the gap between realized volatility and implied volatility has narrowed to recent lows: Realized volatility and implied volatility are very close now, and the room for further narrowing may be minimal. Seasonal factors should not be overlooked. An analysis by Dow Jones Market Data shows that September has historically been the weakest month for the S&P 500 index. Recently, the Cboe Skew index has risen from its lows in August, indicating that some investors may be beginning to change their attitudes. Analysis from SentimenTrader noted that when the VIX is below 15 and at the bottom of a 126-day range, significant volatility usually does not arrive immediately, but that does not represent a risk-free state; instead, risks may be delayed, with worst-case scenarios potentially becoming more severe after a buffer period. Risk warnings may trigger early, while price instability often follows, SentimenTrader wrote. This situation has prompted some funds to take the opportunity to hedge against a tail risk. On Thursday, an institutional investor spent $23.4 million buying a series of put options that would yield massive returns if the S&P 500 index falls by 38% by December 18. Sosnick from Interactive Brokers commented on this situation: If youre in a drought, no one really wants to buy an umbrella. But this might be the best time to buy one.