Devil-may-care day traders have become the dominant force in the market for bullish US stock options, as the professional investing class dials back bets after months spent chasing this year’s tech driven melt-up.
(Bloomberg) — Devil-may-care day traders have become the dominant force in the market for bullish US stock options, as the professional investing class dials back bets after months spent chasing this year’s tech driven melt-up.
Retail investors — those making bite-sized trades of 1 to 10 contacts at a time — almost doubled their activity in single-stock options last quarter from the period before, according to an analysis of Options Clearing Corp. data by Barclays Plc.
At the same time activity among big institutions declined, and on June 23 the volume of calls traded by retail surpassed that of the professionals for the first time in almost a year.
That role reversal speaks to a wider debate currently gripping American equities: How long and how far to chase this unexpected rally? The S&P 500 has clocked its second-best start to a year this century — even as policymakers battle inflation and fears for the economy linger.
The declining appetite for calls among pros “could simply be because institutional investors already added to their equity exposure in the first quarter so don’t have much room to add upside exposure,” Stefano Pascale, a strategist at Barclays, said by email. “Retail investors appear relatively more bullish.”
The Robinhood crowd made up almost 15% of options volume earlier this month — in the top percentile of readings going back to early 2022, according to data compiled by JPMorgan Chase & Co.’s Peng Cheng. Appetite for single-stock tech options played a big role in that.
While the grip of amateur investors isn’t as pronounced as during the meme-stock frenzy of 2021, their influence on the broader market is still visible. Risk-on appetite among retail traders has played a role in the breakdown of the usual relationship between the S&P 500 and the Cboe Volatility Index, or VIX, reckons Rocky Fishman, founder of derivatives analytical firm Asym 500.
On July 5, the one-month correlation between the benchmark equity gauge and VIX futures turned positive for the first time in data going back to 2006, his analysis shows.
“The backwards correlation is one potential byproduct of heavy call buying as the market rallies,” Fishman said by email. The idea is that the call activity is fueling individual stock gains even as some investors worry about index-level turbulence.
How long the risk-on sentiment among retail traders lingers remains to be seen. While non-professional investors continued to participate in the stock rally following a cooler than expected inflation print this week, their power has somewhat waned, data compiled by Vanda Research show. But earnings season could reignite the momentum.
“We expect the more aggressive retail punters to add wagers in out-of-the-money call options in EV companies and other high-beta retail favorites during this reporting season, as they typically do when overall sentiment is more upbeat,” Vanda Research analysts including Marco Iachini wrote in a note to clients. “We’ll probably see robust inflows over the coming days if equity markets maintain their uptrend.”
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