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Big Hedge Funds Suddenly Bullish

Barrons  – Be bullish. That’s the overarching message from the options market as it fills with talk of two major developments that suggest the stock market will keep rallying to new record highs.

Major hedge funds are reportedly buying, or have bought, massive amounts of Standard & Poor’s 500 index calls in the over-the-counter options market. The calls would increase in value if the index, now at about 1,664, rises to 1,725 by year’s end. The funds reportedly missed the stock market’s rally and are playing a vicious game of catch-up.

Though it is difficult, if not impossible, to penetrate the veil of secrecy that surrounds the OTC markets, evidence in the listed options market suggests investors are clamoring to buy bullish calls.

The CBOE Volatility Index (VIX), which should decline when stock prices rise, is increasing. Traders said the unusual behavior means that the banks selling OTC calls to big hedge funds are buying the VIX to hedge their positions.

Also, evidence suggests that big funds are not alone in making bullish bets in the options market.

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