How Retail Investors Are Fueling the Nasdaq’s Wild Ride

Kwamé Adams, a 30-year-old from Georgia, says he started buying stock options on his Robinhood app in August after watching tutorials on YouTube.

Tech stocks

were surging, and Adams realized that “you can make much more money from options.” But on Sept. 3, the market reversed direction, and an


call option he bought for $122 that day quickly became worthless.

“It has been a roller coaster,” he says.

The entire

stock market

has been on this roller coaster, and investors like Adams at times seem to be in the driver’s seat. The heavy buying of call options, which give holders the right to purchase individual stocks or indexes, helped fuel the August surge in stocks like Apple (ticker: AAPL) and


(TSLA), and probably contributed to a recent sharp reversal in tech stocks earlier this month.

Option volume in single-stock equities averaged a record 18.4 million contracts a day in August (each contract gives the holder the right to buy or sell 100 shares of stock), up about 80% from the average monthly volume during 2019, according to

Cboe Global Markets.

So far this month, activity has increased further, with single-stock option volume running at an average of 23.8 million contracts a day through Sept. 8, driven in part by a sharp rise in Apple and Tesla options trading after their Aug. 31 stock splits.

Options are used for many purposes, including the purchase of put options to protect portfolios from market downturns.

But much of the action this summer has involved investor purchases of call options to effectively get leveraged bets on leading stocks.

“There has been a huge ramp-up in speculative trading,” says Jason Goepfert, president of research firm Sundial Capital Research, who has called it a “retail option-trading frenzy.”

Indeed, while there are whales in the market—like Japan’s

SoftBank Group

(9984.Japan), which reportedly bought call options on $50 billion of technology stocks—it is the minnows who are making the water choppy.

“These small traders have become the biggest part of the options market,” Goepfert says. “Since mid-July, trades for 10 contracts or fewer have consistently accounted for more than 60% of all opening call purchase premiums, massively dwarfing larger trade sizes.”

Anthony Denier, CEO of Webull Financial, a privately held online broker that, like Robinhood, appeals to young traders, says, “These are not calls or puts people are buying and selling for the premium; they’re not doing it to hedge a position. These are naked, purely speculative plays that we’re seeing.”

He is noticing lots of traders buying short-term out-of-the-money calls—all-or-nothing bets that a stock will rise in a short period—a trend that he hasn’t seen previously. “You’re hoping for a huge swing in a very short amount of time,” Denier says.

A bull market in tech stocks, near-zero trading costs, seamless online technology, and perhaps boredom for millions of Americans stuck at home, have all added fuel to the options-trading fire.

“Some of it is the FOMO [fear of missing out],” says Garrett DeSimone, director of quantitative research at OptionMetrics. “People see stocks like Tesla and Apple going through the roof, and they hear about people making money in call options.”

Options trading is part of a trend to democratize investing, giving more power to retail investors. Yet the surge in options trading is also adding volatility to the markets. Even for investors who stick with stocks and funds, knowing the dynamics of—and the risks in—options trading is critical to understanding today’s market.

Retail investors often gravitate to short-dated, lower-priced options that are out of the money, meaning that the stock needs to appreciate quickly for an investor to make money. These options often amount to lottery tickets, DeSimone says.

Highlighting this trend, some 60% of all single-stock options trading recently has been in those with less than two weeks until expiration, compared with 45% at the start of 2020, according to Susquehanna Financial Group.

And reflecting the growth of retail participation, the average option trade is now six contracts, half the level of two years ago, and an increasing number are just a single contract.

Single contracts account for about 12% of all volume in call equity options, up from 6.5% at the start of 2020, according to Susquehanna, and about 11% for put options. Single contracts total about two million a day and can influence the markets, given that they are based on 200 million shares of stock.

This summer, those trades were winners, as Tesla, Apple,

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