Investors are taking a cautious approach to the market, reducing equity exposure while still seeking ways to participate in potential gains. According to Nomura’s McElligott, there has been an extraordinary surge in one-week net call demand, with single-stock calls reaching the 100th percentile and ETF calls the 98th percentile on a five-year lookback. This trend suggests that investors are replacing outright stock exposure with cheaper upside optionality, seeking to minimize downside risk while still positioning for potential gains.

While the market may be de-risking, investors are still wary of missing out on a potential year-end rally. This FOMO (fear of missing out) mentality is evident in the surge in call demand, as investors seek to protect themselves against potential downside while still participating in potential upside. The interpretation of this trend is that investors are looking for ways to reduce their exposure to downside risk while still maintaining some level of upside participation.

The chart below, provided by Nomura, illustrates the extraordinary surge in one-week net call demand. The chart shows the percentage of trading days with net call demand at the 100th percentile or higher for single-stock calls and ETF calls on a five-year lookback. The chart clearly shows that call demand has reached extraordinary levels, indicating that investors are seeking cheaper upside optionality while still protecting themselves against potential downside.