“A never-ending melt-up in index.”

That’s what befuddled bears were pondering by the end of a week that saw rally skeptics’ worst fears realized: Nvidia blew away estimates and guided for more, triggering the single largest one-day value creation event in US stock-market history.

You might’ve expected to see some profit-taking, and maybe there was some of that on Friday, but as Nomura’s Charlie McElligott noted, call skew was “crazy bid” again in Nvidia’s wake, as market participants continued to chase and grab for upside.

The figures below really are quite remarkable, which is why I keep highlighting them every few sessions.

Charlie described “an extreme client tilt” towards upside exposure which, as the visuals show, is manifesting in a completely asymmetric options profile.

It’s not just Nvidia and AI, although that’s plainly a big part of it. Indeed, as McElligott noted, Thursday’s session evidenced an “absurd” gamma squeeze in Nvidia, AMD and so on, indicative of “all-day call buying” which kept the shares “relentlessly and perpetually bid.”

On the macro front, it’s all about the notion (discussed here on too many occasions to count since market pricing for Fed cuts in 2024 caught down to the December dots) that three cuts plus solid growth is a better outcome than five or six cuts with decelerating growth, as the latter conjuncture would presumably be recessionary.

In addition, it’s worth noting that with the market and Fed now aligned on the rates trajectory, there’s less tension and, perhaps, less scope for an abrupt, destabilizing rates reset. That was one narrative bandied about this week.

The “Goldilocks with easing” thesis, alongside the AI frenzy, “flipped the script” on options dealer positioning, Charlie went on, noting that dealers would typically be “short downside to hedgers and long upside from overwriters,” whereas now, amid little to no demand for downside and call-buying to account for perpetual fear of a melt-up, clients are selling puts not just for income, but “to fund cheap convexity into calls.”

The table shows the Sharpes on that, which are better even that a simple long stocks “strategy.”

McElligott summed it up. “Collectively then, dealers are consistently short upside gamma and grabbing delta to hedge into a never-ending melt-up in index, with the rally ironically too being fed by overwriters who are consistently being stopped-into their short strikes from the calls they’ve previously sold for income,” he wrote.

All together, those dynamics have “fueled spot index to levels [which] were inconceivable just a month and a half ago.”