Options markets say FOMO on the Magnificent 7 has been replaced by plain old fear
Options that protect against downside in the Magnificent 7 have gotten very pricey compared to options that offer upside.
In a market that has enthusiastically embraced and rewarded dip buying, investors’ fear of missing out on the next big push higher has routinely outstripped their fear of losses. That’s particularly true of the Magnificent 7 — Nvidia, Tesla, Apple, Microsoft, Alphabet, Amazon, and Meta — the megacap tech companies that have been critical to the bull market’s advance.
Now, however, fear is exceeding the fear of missing out.
The gap between the implied volatility of options 20% below the Magnificent 7’s current prices and options that are 20% above where they’re trading has soared in recent sessions.
In other words, it’s gotten much more expensive to protect against more downside than it is to chase upside, an indication that hedges are in demand.
This premium of implied volatility for bearish options relative to their bullish counterparts is about 1.8 standard deviations above its one-year average for the Magnificent 7 collective. That’s a level that’s seldom been seen during this bull market, surpassed only in early August 2024 when volatility went haywire as the unwind of the yen carry trade and recession fears rattled markets.
As retail investors still appear pretty giddy about megacap tech stocks, particularly Tesla and Nvidia, this pricing implies that larger institutional players are growing concerned about the potential for losing even more of the massive gains they’ve accrued on these stocks over the years.
One potential silver lining: the appearance of fear is often a prerequisite for finding a tradable bottom in many asset classes.
