Investors' aggressive buying of bullish call options has become yet another indication of just how frothy the U.S. equity market is becoming.
On Friday, the five-day moving average of the Cboe equity-only put-to-call ratio fell to 0.452, its lowest level since March 30, 2022, according to Dow Jones Market Data.
Mark Arbeter, president of Arbeter Investments, told MarketWatch that, in his view, this latest milestone reflects just how frothy sentiment has become among individual investors. It suggests investors' enthusiasm for stocks may have become overblown amid the artificial-intelligence boom, he said.
This low reading on the put-call ratio shows that investor demand for bullish call options has recently been more than twice as great as demand for bearish put options, Arbeter noted. Even if that isn't a direct sell signal at the moment, it is one reason investors should proceed with caution.
"That ratio, historically, is extremely low," Arbeter said.
Put options can represent either a bet that stocks will fall, or a hedge against that outcome.
In the past, when this put-call ratio was at a similar level, it preceded periods of sustained losses for stocks. The last time it was here was during the first "countertrend rally" of the 2022 bear market, Arbeter said. Prior to that, it reached these levels in late 2021.
"We also saw levels like this ... right when the market was topping going into the 2022 bear market," he added.
Arbeter said he is also keeping an eye on the 21-day moving average of the equity put-call ratio, which on Friday fell to its lowest level since late 2021. As long as this gauge is in a "downtrend," the stock market may continue to go up, he said.
Friday's 21-day moving average for the Cboe equity put-to-call ratio was 0.493, the lowest since Dec. 9, 2021 when it was 0.490, according to Dow Jones Market Data.
All three major U.S. equity benchmarks - the S&P 500, Dow Jones Industrial Average and the technology-heavy Nasdaq Composite - ended at fresh record highs on Monday, according to Dow Jones Market Data.
While the U.S. equity market's Cboe Volatility Index, better known as the VIX, has been sliding, signaling bullishness on behalf of investors, Mandy Xu, head of derivatives-market intelligence at Cboe, pointed out in a note shared with MarketWatch on Monday that single-stock volatility has jumped.
Xu found that single-stock volatility, as measured by the VIXEQ Index, was nearing a one-year high last week, while its spread relative to the VIX has widened to a record.
It is the latest sign that dispersion within the stock market has risen to extremely high levels, as stocks linked to the AI trade have powered much of the S&P 500's gains over the past two months.
The S&P 500's information-technology sector rallied a sharp 2.5% on Monday - buoying the index even as most of its 11 sectors fell, FactSet data showed. Tech and energy were the only two sectors to finish higher Monday, as oil prices climbed after Iran reportedly stopped peace talks with the U.S. and looked to move to fully block the Strait of Hormuz - a vital waterway for shipping oil and gas from the Middle East.
But U.S. President Donald Trump indicated Monday that talks were ongoing between the nations.
"Talks are continuing, at a rapid pace, with the Islamic Republic of Iran," Trump said Monday afternoon in a social-media post.
