7000 points become a key psychological barrier: The options market indicates that the S&P 500 may enter a consolidation phase in the next two months

The U.S. stock market is expected to perform excellently in 2025, but the derivatives market is signaling that the momentum of this rally may be running low.

Recent developments show that S&P 500 index options expiring in late December are heavily concentrated around a strike price of 7000 points. This level would imply a 19% increase for the index in 2025, but there is only about a 2.5% upside from Thursday's closing price of 6822.34 points, indicating that market participants are cautious about further upside before the end of the year.

Although Wall Street remains generally bullish on the outlook for U.S. stocks, there are reasonable grounds for this cautious sentiment. Federal Reserve Chairman Jerome Powell recently stated that a third rate cut is far from guaranteed. Meanwhile, the latest earnings from tech giants have raised concerns in the market about spending prospects in the artificial intelligence sector.

Additionally, signs of economic slowdown and cracks appearing in the high-risk credit market have led investors to question the health of the U.S. consumer. The vast majority of the index's gains have been contributed by a few stocks, and if these heavyweight stocks perform poorly, the market could face a correction risk. These macro-level uncertainties provide fundamental support for conservative bets in the options market.

The Psychological Pull of 7000 Points

The concentration of options positions around 7000 points can be partially explained by investor behavioral psychology. Investors often tend to position themselves near round numbers, which naturally attracts more trading activity at certain levels.

"The 7000-point strike price is a very popular psychological level," said Joseph Ferrara, an investment strategist at Gateway Investment Advisors. In options trading, the strike price refers to the price at which traders can buy or sell the underlying asset on the expiration date.

Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, also agrees with this view, stating:

"A round number strike price tends to get more attention."

In addition to trading psychology, fundamental concerns also support the market's cautious sentiment. Following Powell's hawkish comments on rate cut prospects, some strategists have begun to lower their bullish expectations, even though the last two months of the year are typically a seasonally strong period for U.S. stocks.

There are also concerns in the market regarding economic and credit conditions. There are signs that the economy is slowing down, and cracks are beginning to appear in the high-risk credit market, raising questions about the sustainability of consumer spending. Furthermore, the highly concentrated nature of this year's market rally is also alarming—most of the index's gains have been driven by a few large tech stocks, and if these "leaders" stumble, the entire market could face pressure.

The Complex Structure of the Options Market

In addition to psychological and macro factors, the complex trading structure of the options market itself is also an important reason for the concentration of positions. According to Chris Murphy's analysis, about half of the open contracts near the 7000 strike price may be related to an equity financing transaction known as a "box spread." This type of transaction uses index options for loan-like operations, with the aim not being directional bets.

Moreover, the so-called "whales selling call options" in the industry have also impacted market structure. Reports indicate that funds under JP Morgan Asset Management hold a large number of sold call options, and the systematic operations of such institutions can lead to an abnormal concentration of option positions at specific strike prices.

Against the backdrop of potentially limited upward space for the index, some market participants suggest that investors shift their focus from the broader market to individual stocks. Chris Murphy believes that for those who missed part of the gains in the artificial intelligence sector, considering individual stock options may be preferable to betting on a broader index.

He added that for portfolio managers trying to catch up with the retail-driven artificial intelligence boom, buying call options on individual companies is a "more effective tool" than index options. "The explosive potential of the S&P index is not as strong as that of individual stocks," Murphy stated:

"In short, retail investors are fully invested in artificial intelligence, while institutional investors are more cautious and skeptical about this rebound, so for them, buying individual stocks like Mag7 for upside potential is a natural choice."