Mr. Patel, a 27-year-old nurse in Columbus, Ohio, thought it would be worth it after chattering about Robinhood lighting up a stock market chatboard. So on August 4, he paid $600 for a call option—a contract that provided the right, though not the obligation, to buy 100 shares at a certain price by a specified date.
He bought the fastest option on the first day of options trading at Robinhood. It will become usable once the shares reach $70, an increase of 50% from their closing price on the previous day and almost double the IPO price of last week.
In evidence of the growing influence of individual investors on some preferred stocks, the call option became exercisable a few hours later due to a boom in Robinhood shares. Mr. Patel sold the option for about $950 – after putting up only a fraction of the price of the shares, earning a profit of about 60% in just 30 minutes. Robinhood shares closed that day at $70.39.
“I didn’t know what the options were last year,” Mr Patel said. “You Can Quickly 100%, 200%, 300%” [gains] Within minutes if things go your way.”
Of course, “you can lose just as quickly,” he said.
This episode shows how rising options trading has changed the markets. Adding to the concerns of some analysts and portfolio managers, Apple Inc. and Amazon.com Inc. From bets on tech giants like electric car maker Tesla Inc., have accelerated a roaring recovery from last year’s coronavirus-induced market crash. That activity could make the market more vulnerable to volatility.
Options activity has “a huge impact,” said Kem Courson, founder of investment firm Kai Volatility Advisors. Mr. Courson oversees an options strategy that seeks to profit from these moves. “When things get big, they Bigger than ever.”
Professional investors have long tracked the options market for clues on the next turning point in the stock market. Now, with individual investors favoring their small upfront investments and potentially quick payouts, options trading is hitting never-before-seen levels.
At times, options trading dwarfs the activity in stocks, leading traders and analysts to say that leverage amplifies both up and down moves in the market.
Data from Cboe Global Markets shows that nine out of 10 of the most active call-option trading days in history occurred in 2021. An average of 39 million options contracts have changed hands this year, according to data from Options Clearing Corp., up 31% from 2020 and the highest level since the market’s inception in 1973.
Although the majority of this trading is being done by Wall Street firms that operate behind the scenes, the rise of riskier options trading by individuals is unmistakable: by one measure, options trading by individual investors has increased nearly four-fold over the past five years. Has been, according to Kobe data.
“I’m hooked on options,” said Brit Keeler, a 40-year-old individual investor based in Winter Park, Fla.
Mr. Keeler said that this year, unfairly placing options bets on AMC Entertainment Holdings Inc. cost him about $12,000 in his trading account, which he is slowly building back up. Still he hasn’t given up.
“Everyone is using leverage. And they’re using it because you can make a ton more money,” he said.
Last week, as the stock market recorded its biggest sell-off since May, Mr. Keeler says he bought bullish call options on the S&P 500, jumping back toward record highs by year’s end. The gauge has hit a new high of over 50 and is still up 19% this year after a volatile stretch.
So far this month, single-stock options with an estimated value of about $6.9 trillion have changed hands, adding up to more than $5.8 trillion in shares, according to data from Cboe as of Sept. 22. The underlying options are of contract value, a figure that fluctuates with daily movements in the shares.
By one measure, options activity is on track to surpass activity in the stock market for the first time. In 2021, the daily average notional value of traded single-stock options exceeded $432 billion, compared to $404 billion in stocks, according to calculations by Cboe’s Henry Schwartz. According to Cboe data going back to 2008, this would be the first year on record that the value of the option’s changing hands exceeded that of the stock.
On average, Apple options with a notional value of more than $20 billion have changed hands daily compared to nearly $12 billion of the iPhone-maker’s stock this year, according to a Wall Street Journal analysis of Cboe data. About $80 billion worth of Tesla options have changed hands daily this year, nearly quadrupling that figure in the stock.
Some analysts say that the excitement of options trading is turning into large volatility in individual stocks, and is fueling the momentum behind several rallies. When individual investors buy call options, Wall Street firms that sell the options often hedge their positions by buying shares, and contribute to rising markets.
On January 27, when GameStop Corp. shares jumped 135% — their biggest single-day move on record — as more than $53 billion worth of the company’s options changed hands, up from the nearly $32 billion that traded in its stock, According to a Journal analysis of Cboe data.
“It’s a circular kind of meltdown. It’s a strong loop,” said Mr. Karson of options activity in individual stocks.
Traders say that the activity could also add to the bearishness, although the stock market has registered a steady climb for the past one year. Heavy trading has made quarterly dates when options expire a focus point for many investors, who say hedging activity around contracts could foster greater volatility in the stock market.
Traders and analysts say that short-term trading using derivatives, including options, could increase the chances of a violent shakeout if individual stocks or major indexes make sudden turns.
On Monday, September 20, the stock market tumbled due to the prospect of a possible default by Chinese property developer China Evergrande Group, after strategists at JPMorgan Chase & Co said hedging by options traders was worsening sales, as had happened. During the March 2020 market crash.
Rishabh Bhandari, Portfolio Manager, Capstone Investment Advisors, said that just as bullish call options have helped bullish stocks like Gamestop and AMC, traders who buy bearish put options also help them pull off huge losses in individual companies. can do. Low liquidity in certain corners of the market, or high derivatives activity with ease of trading can mean high volatility.
“These steps are greatly exaggerated,” Mr. Bhandari said.
But traders are not the only ones taking part in the options boom. Selling options-related investments has become a big business, which may give these investments some staying power. Assets under management for exchange-traded funds and mutual funds using derivatives strategies hit a record $58 billion in August, up nearly 55% from the end of 2020, according to data from Morningstar Direct.
In chat rooms on the social networking platform Discord, hundreds of traders track options activity on stocks and major indexes, looking for an idea of what the stock will do next.
“Options now move the market a lot,” said individual trader Mr. Patel.
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