• Thu. Nov 26th, 2020

Dimancherouge

Technology

How Tech Options Started Juicing the Stock Market

1. Why are options under the spotlight?

The options market in the U.S. has exploded this year. Trading volumes of single-stock options exceeded those of regular shares for the first time during July, according to Goldman Sachs Group Inc. strategists. Options became hugely popular with retail investors seeking to ride the technology share rally. That’s had some peculiar effects on markets, such as reversing the usual relationship between options and stock prices, which typically move in opposite directions but have been rising together. An unusually volatile Nasdaq 100 Index — it fell 4.9% or more in three straight trading sessions in early September — also hinted at the outsize influence of options.

An option is a financial contract that gives the holder the right to buy (a call option) or sell (a put option) an underlying security at a predetermined price. A contract typically references 100 shares, meaning that for a relatively small sum an investor gets exposure to a lot of stock. For example, to buy an option on Apple stock rising over the next week might cost a few hundred dollars compared to more than $10,000 to purchase 100 shares. Given how Apple shares rose for 19 of the 23 weeks from the final week of March, it’s easy to see why options became a favored trade.

3. How exactly are options moving markets?

One theory is that the explosion in demand for options fed into gains in the stocks. That’s because the people offering the contracts (options dealers) typically offset losses or gains on their positions by trading in the underlying stock. When the price of the share moves, they’re forced to adjust their hedges. For example, if a dealer sold call options to clients, they’d usually buy the underlying stock when it rises and sell when it falls. Taken together, these hedging trades can influence equity prices but by exactly how much is a matter of speculation. Some analysts say hedging by options dealers had more impact this year because of the fierce demand for short-term options in single stocks. When there’s not much time before expiration and a contract is likely to be profitable, dealers have to be more active in adjusting their positions, which can fuel volatility. Some analysts disagree and contend that the influence of such hedging trades has been overstated.

4. Who has been buying options?

Retail investors using trading apps such as Robinhood piled into bullish bets on tech shares, lured by the appeal of supersized gains from leveraged trading of popular stocks. Larger investors eventually joined the fray, too. The Financial Times reported that SoftBank Group Inc. poured billions into bets on Amazon.com Inc. and Microsoft Inc. using a trade known as a call spread, earning itself the moniker the “Nasdaq whale.” The trade involved simultaneously buying and selling a call option — a technique that caps possible winnings but also lowers costs. According to the FT, the Japanese investment group spent $4 billion on options focused on tech stocks. That compares with the $40 billion in call premiums paid by retail investors in a single month, according to data compiled by Sundial Capital. Whether the enthusiasm for options continues after the big tech shares tumbled in early September remains to be seen.

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