Reddit’s army of meme-stock traders can now move the values of the biggest companies in the world because hedge funds are chasing them into options trading strategies. Look what happened to Apple this week. Eric Platt and Madison Darbyshire report in The Financial Times:
Investors pointed to several reasons for its strength, including the fact the company is a defensive play as uncertainty abounds over the coronavirus and as monetary policy shifts at the US Federal Reserve.
Trading volumes in Apple have been impressive as mentions of the company have climbed up the ranks on Reddit message boards. It was the most discussed stock this week on the r/WallStreetBets, a forum popular with retail investors, according to data provider Breakout Point.
Investors have purchased an extraordinary number of Apple call options, derivatives contracts that pay off if its shares rise in value. On Wednesday and Thursday, more than 5m call contracts in total were purchased, with both days ranking among the 15 busiest Apple options trading days in history.
The purchases have been concentrated on soon-to-expire options contracts, which are often favoured by retail investors. Strategists debated whether the large call option purchases had in turn forced up the price of Apple’s stock as derivatives dealers tried to hedge their exposure.
The sheer size of the trades indicated that hedge funds and other institutional investors were executing similar trades, hoping to catch some of the momentum sparked by retail investor buying, according to Amy Wu Silverman, an equity derivatives strategist at the Royal Bank of Canada.
“Institutions are literally waiting for the scent of retail, because they know it increases the momentum,” she said. “The retail footprint becomes the institutional footprint very quickly. It almost snowballs what was a pure retail move.”
Read more here.