Caution has become the most expensive position on Wall Street.
A hot inflation reading this week — sending the annual gauge to its highest in about three years — landed alongside fresh strikes in the Persian Gulf and enduring expectations that the Federal Reserve may need to keep policy tight. Stocks extended their longest weekly winning streak since 2023 to fresh records anyway. Junk bonds rallied, Brent crude headed for its worst month since 2020 and the cost of insuring against a selloff tumbled.
The gains across risk assets owed less to conviction than to the rising cost of being left behind. Investors who have spent months doubting the rebound find themselves underexposed as the S&P 500 extends its climb from the March lows, corporate-bond spreads narrow toward multi-decade lows and bearish wagers are steadily squeezed. Across a slew of options markets, the fear of missing another leg higher appeared to outweigh the fear of a downturn.
The retreat from caution is clearest in the options market. The cost of protecting against an ordinary selloff fell to its lowest since early 2025 by one measure, while the cost of insuring against a sudden crash dropped to its lowest this year. Demand for bullish calls, by contrast, has proved relentless across semiconductor stocks, underscoring how concentrated the market’s optimism remains in a narrow group of AI winners.
Yet for all the risk-taking, investors are not fully committed. Hedge funds and trend-following funds have rebuilt equity exposure, Barclays Plc noted, but long-only buying has cooled, retail participation has stayed light and plenty of cash remains on the sidelines, leaving the market crowded in places but far from all-in.
The protection that would cushion a selloff, meanwhile, has been stripped away just as the economic data has softened: consumer confidence has weakened, income growth has slipped and new-home sales fell in April. Stocks closed at records all the same, on reports of a US-Iran deal that President Donald Trump has yet to confirm.
“The market is keying off the fact that Trump does not want to reengage in widespread combat operations,” said Michael O’Rourke, chief market strategist at JonesTrading. “If the deal is rejected, the market will simply continue to wait for the next iteration of it. The market will react negatively if President Trump recommences significant combat operations or if oil prices rally sharply.”
Few investors want to be the last holdout if the ceasefire holds, oil retreats and the rally broadens beyond its narrow leadership. The question is whether markets have become more confident in the outlook, or simply less willing to pay for protection against being wrong.
The S&P 500 rose 1.4% on the week, widening the advance to nine weeks, its longest winning run since 2023, while Treasuries — bid as easing oil and inflation fears pulled yields lower — headed for their best week since the US war on Iran began. Brent crude slid to $92 and volatility tumbled across nearly every asset. The pain fell hardest on the skeptics: a Goldman Sachs Group Inc. basket of the most-shorted companies has soared more than 30% in two months, leaving anyone positioned for a reversal nursing losses.
The same impulse ran through every market: across stocks, credit and options, investors were accepting less and less compensation for taking risk. As the advance ground higher, the willingness to insure against it drained away. Skew — the premium investors pay to protect against sharp declines — sank back to levels last seen in January 2025, and demand for deeper tail-risk protection, after a brief surge, fell back toward its lowest level this year.
“A lot of folks think even if we do get a drawdown, it will just be bought. It’s tough,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. “The old saying is ‘hedge when you can, not when you have to.’ The issue is, as cheap as skew looks, it just keeps getting cheaper.”
What money was being spent went the other way. Options positioning in the $68 billion VanEck Semiconductor ETF shows extreme demand for upside, according to Nomura Holdings Inc.’s measures, with investors paying unusually high premiums for out-of-the-money calls even after how far the rally has run. The appetite is broad: by SpotGamma’s count, 20 of the 25 largest Nasdaq companies carry call prices in the top tenth of their historical range, a level unseen since June 2024.
To the desks that price these trades, the buying looks less like mania than catch-up — a scramble by managers who doubted the rally to buy back exposure they never had.
“Traders are clearly chasing upside protection, but it is less about indiscriminate call buying and more about paying for exposure to upside tails after being underexposed to the AI-led rally,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. “My read is that investors are no longer just hedging downside; many are hedging the risk of missing another leg higher.”
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Read more articles by Denitsa Tsekova, Natalia Kniazhevich
