Stock options volume now exceeds the volume of underlying shares. Speculation is rampant in the stock market. “Investing” in stocks is being treated more like a roll of the dice than it is a long-term strategy for building wealth.
Gregory Zuckerman and Gunjan Banerji report for The Wall Street Journal:
The two strategies show no signs of fading despite big declines in the past week. Taken together, they will likely continue boosting volatility in markets already grappling with an uncertain economy, the coronavirus pandemic and a presidential election that may not have a conclusive result for days or even weeks.
Adding to the mix is rising interest among Asian investors in stocks like Tesla Inc. The new money can make options and momentum strategies self-fulfilling, drawing in additional money hoping to cash in on the gains.
The volume of trading in single stock options recently topped the volume of regular shares for the first time, according to a Goldman Sachs analysis of notional shares and options traded. As of the end of August, single stock options volume made up more than 120% of the volume of shares, up from around 40% three years ago.
It has been a record year for options volumes. So far in September, about 35 million single stock and ETF options contracts have changed hands on an average day, up about 92% from the same month last year, according to Henry Schwartz, senior director of market intelligence at Cboe Global Markets.
Options traders tend to thrive on market volatility, which roared back at the start of September. The S&P 500 recently logged its biggest three-day percentage decline since June, while the tech-heavy Nasdaq Composite recently entered a correction—defined as a 10% drop or more from a recent high—in record time, snapping an extended period of calm.
Small investors bought call options with roughly $500 billion of notional value in August, says Benn Eifert, managing partner of $125 million hedge fund QVR Advisors, citing data from the Options Clearing Corp. That’s five times the previous monthly high for these smaller accounts, reached in early 2018.
“The trading of options over the last six months, particularly by small traders, is quite incredible and off the charts,” says Mr. Eifert, whose firm is active in options markets. “It’s a steamrolling trend that’s having a very meaningful dynamic for markets.”
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