Wall Street abandons hedging; the most shorted stocks surge 30% in two months.

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As risk assets rise across the board, caution itself has become Wall Street’s most expensive price to pay.

The S&P 500 Index extended its nine-week winning streak this week, setting the longest streak since 2023 and reaching new historic highs. Meanwhile, junk bonds strengthened, oil prices posted their worst monthly performance since 2020, and the cost of hedging downside risks dropped to the lowest level of the year. Goldman Sachs’s short-stock basket surged more than 30% over the past two months, causing heavy losses for short sellers.

The driving force behind this rally is less about investor confidence in the outlook and more about the growing "fear of missing out" at a higher cost. Investors who were skeptical and underweighted stocks for months are now facing pressure of passive lagging, being forced to chase exposure. In the options market, the cost of hedging against downside continues to drop, while demand for betting on upside remains high.

Barclays pointed out that hedge funds and trend-following funds have rebuilt their stock exposure, yet long-term funds’ buying momentum has cooled, retail participation remains low, and much cash continues to stay on the sidelines. The market shows crowding in certain areas, but is not yet in "all-in" mode.

Hedging costs hit yearly lows

The price of downside protection is dropping to rarely seen low levels.

The cost of hedging for ordinary declines has fallen to its lowest since early 2025, and the price of tail-risk insurance for extreme crash scenarios returned to yearly lows after a brief spike. The "skew" measuring the premium investors pay for significant downside protection has slid back to January 2025 levels.

RBC Capital Markets head of derivatives strategy Amy Wu Silverman said:

"Many people believe that even if there’s a pullback, money will flow in immediately. The old saying goes: ‘Hedge when you can, not only when you have to.’ The problem is, skew looks very cheap, but it keeps dropping lower."

This de-protection trend is happening just as economic data weakens: consumer confidence is down, income growth is slowing, and new home sales in April have declined. Still, the stock market closed at new records amid reports of a US-Iran deal—even though Trump himself hasn’t confirmed the agreement.

Michael O’Rourke, chief market strategist at JonesTrading, pointed out:

"The core logic behind market bets is that Trump doesn’t want to re-engage in large-scale military actions. If the deal falls through, the market will just wait for the next round of talks. Only if Trump restarts major military operations or oil prices soar will the market react negatively."

Semiconductor option demand is extremely tilted bullish

The direction of capital flow is clear: spending to protect the downside is decreasing, while the cost of betting on upside keeps rising.

Nomura Holdings data shows that options positions on the $68 billion VanEck Semiconductor ETF display extreme upside demand—even after the rally has fully played out, investors are still paying unusually high premiums for out-of-the-money calls.

According to SpotGamma statistics, out of the top 25 market cap companies in the Nasdaq, 20 have call option prices at the top 10% of historical range, marking the first time this level of concentration has occurred since June 2024.

Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, said:

"Traders are clearly chasing upside protection, but it's not indiscriminate call buying. Rather, investors underweighted in the AI-driven rally are adding tail upside exposure. My take: investors aren’t just hedging downside—many are hedging the risk of missing the next rally."

For the trading desks pricing these trades, this buying surge looks more like catching up, not a signal of market mania: fund managers who were skeptical of the rebound are now buying the exposure they never had.

Multi-asset sentiment improves, oil prices drop, US Treasury yields fall

This shift in sentiment is not limited to the stock options market, but runs through nearly all risk asset classes.

In the credit market, corporate bond spreads continue narrowing, approaching decades lows; junk bonds keep rising. In commodities, Brent crude fell to $92 a barrel, volatility is falling across nearly all asset classes. US Treasuries benefit from falling oil prices and easing inflation fears, with yields decreasing.

The pain is concentrated among short sellers. Goldman Sachs’s basket tracking the most heavily-shorted stocks jumped over 30% in the past two months, inflicting heavy losses on any positions betting on reversal.

This week, a hotter inflation data pushed annual inflation indicators to near three-year highs, another strike occurred in the Gulf region, and the prospect of continued Fed policy tightening remains—but none of these factors stopped risk asset momentum.

Risk warning and disclaimerThe market involves risks, investment needs caution. This article does not constitute personal investment advice and does not take into account an individual user’s special investment objectives, financial situation, or needs. Users should consider whether any opinions, viewpoints or conclusions in this article fit their specific circumstances. Investing accordingly is at your own risk. ```