The Hindu: Published on 10th Oct 2025.
Why in News?
The U.S. stock options market is currently witnessing an unusual wave of euphoria, as traders and investors rush to buy call options — financial contracts that bet on stock prices going higher. The demand for these call options has surpassed that of put options by the widest margin in nearly four years. This reflects a powerful “Fear of Missing Out (FOMO)” among investors as the S&P 500 and Nasdaq indices reach new record highs.
According to the Barclays Equity Euphoria Indicator, investor optimism has surged to extreme levels, signaling that the market may be entering a late-stage bullish phase that often precedes correction.
Background:
Options trading allows investors to speculate on or hedge against stock price movements. A Call Option is purchased when traders expect the price of a stock to rise, while a Put Option is used to protect against price declines. When call volumes outnumber puts significantly, it shows excessive optimism in the market.
Historically, similar trends have been observed during late-cycle bull markets, such as the dot-com bubble of the late 1990s, where investor enthusiasm drove prices far beyond fundamentals before a sharp correction followed.
Key Developments:
Traders are aggressively buying call options on individual U.S. stocks, signaling strong bullish sentiment. As the S&P 500 continues to rally, its one-month volatility has dropped to a near-record low of about 6.7%, while volatility in individual stocks has actually increased, suggesting speculative behavior.
The Barclays Euphoria Indicator currently sits around 14.3%, almost three standard deviations above its long-term average — a sign of extreme optimism.
Much of this enthusiasm is concentrated in AI, semiconductor, and metal sectors, with tech giants like Nvidia and Broadcom soaring by 38% and 45%, respectively. The Nasdaq Composite Index has gained about 19% this year, while the S&P 500 is up by around 15%.
Causes / Factors Behind the Euphoria:
Several factors are fueling this euphoria:
Explosive growth in AI and tech-related stocks, which are driving investor excitement.
Stock market hitting record highs, encouraging more participation.
Low market volatility, making investors feel safer to take risks.
Fear of Missing Out (FOMO) among those who missed earlier rallies.
Economic optimism and expectations that the U.S. Federal Reserve will maintain a stable policy stance.
Market Impact and Consequences:
Positive Impact:
This surge in bullish activity shows high investor confidence and strengthens market liquidity. It also drives up valuations in key technology and innovation sectors, especially AI and semiconductors, which continue to lead U.S. market growth.
Negative or Risk Factors:
However, such over-enthusiasm can be risky. History shows that when markets become excessively optimistic, returns often start to diminish. Barclays analysts warn that once too many stocks show euphoric signs, future performance tends to decline.
The current situation resembles “late-cycle exuberance,” similar to the final stages of the 1990s dot-com bubble. If the optimism becomes unsustainable, the market could face short-term corrections or volatility spikes.
Expert Views:
Market strategists like Greg Boutle (BNP Paribas) and Stefano Pascale (Barclays) say that this environment “feels like the late 1990s” — a period marked by excessive excitement before the market crash. Pascale warns that high euphoria readings often precede weaker returns.
However, experts also caution that predicting the exact end of such a rally is difficult — as bubbles can last longer than expected, and being too early to exit the market can also be costly. Therefore, investors are advised to adopt a balanced approach, maintaining some exposure to rising stocks while hedging against potential downturns.
Conclusion:
- The US stock options market is currently driven largely by emotion-driven trading.
- While this signals economic strength and investor confidence, the overwhelming dominance of call options suggests the market is overheated.
- History shows that whenever euphoria increases, the market is often followed by a correction or stagnation.
- Therefore, experts advise investors to maintain a balance between enthusiasm and caution—so they don't miss out on gains and are protected from potential downside.
