(Bloomberg) — It’s a notion that would’ve drawn skepticism in the past: That options buyers could drive extreme rallies in tech companies — and in turn push benchmark indexes to record highs — by piling into single-stock contracts. Such side bets, according to conventional wisdom, wouldn’t have enough financial might to move a $30 trillion market.
But after watching call volume explode in Apple Inc., Amazon.com Inc., Facebook Inc. and Tesla Inc. recently, just as the pace of their stock rallies quickened, analysts are starting to embrace the theory. They posit that by acting boldly on a select set of high-flying shares at a time when the professional class is frozen with indecision, traders are able to wield outsize influence. This rush into call contracts, they say, created a bullish feedback loop as dealers were forced to recalibrate hedges.
“In a world where volumes are distorted by the frantic trading of algos, any real order flows may have surprisingly large impact on prices,” Peter Tchir, head of macro strategy at Academy Securities, wrote in a note Tuesday. “By trading options, they leverage their position.”
Signs options buying was driving tech stocks has provoked rampant theorizing on who or what set the speculation off. SoftBank Group Corp. bought billions of dollars worth of options tied to U.S. tech stocks over the past month, according to a person with knowledge of the matter. Bloomberg reported on Aug. 11 that SoftBank had been targeting wagers of more than $10 billion — potentially even tens of billions of dollars — in public stocks using financing structures that can prevent it from showing up in public records as a direct shareholder.
SoftBank, in its August earnings call, said it had acquired positions in some of the FAANG stocks. “Our focus is still companies driving the information revolution,” SoftBank CEO Masayoshi Son said on the call. A SoftBank spokesman declined to comment on Friday.
Whether it’s a single buyer or hordes of retail day traders — or a combination where purchases by one whip up interest in the other — the footprint is visible in popular megacap tech stocks such as Facebook, Amazon.com, Netflix Inc., Google’s parent Alphabet Inc., Apple and Microsoft Corp., where total open interest had exploded higher at the fastest pace since September 2018, just before the Nasdaq 100 dropped more than 20%. The action had mostly been in bullish call options.
Volatility has turned extreme in tech shares over the last two days, with the Nasdaq 100 briefly falling into a 10% correction Friday. Reversals such as this week’s point to the risk that whatever pressure the options market might have spurred on the way up is capable of exacerbating moves lower when selling picks up in cash equities.
Amazon’s call volume averaged 146,000 in the 30 days through Wednesday, near the most-active levels on record. In the late 1990s, an equivalent measure peaked around half that. Meanwhile, Apple call options averaged more than 3 million per day, the most in six years. Facebook’s stats are similar: Call options volume on average over that time frame is the highest since 2013. Meanwhile, Tesla’s daily call options volume once again headed toward 2 million, a record level that was reached earlier this year in February.
With options in popular stocks such as Apple and Tesla more in reach after stock splits, there’s reason to believe retail traders helped drive the boom. Outages across online brokerages Monday were triggered by a wave of individual investor demand after the splits, Bloomberg reported.
Volumes for single stock options with less than two weeks to maturity now make up 69% of options volume, not far off a peak of 75% in late July that was a record in Goldman Sachs Group Inc. data going back to 2013. The short-dated nature of the contracts is a tell-tale sign of retail traders, according to BTIG LLC.
Millions of new traders have rushed to markets in the U.S., enticed by the prospect of zero fees and entertainment while bored at home in the coronavirus age. In the three months ended in June, clients at retail brokerages such as E*Trade Financial Corp., TD Ameritrade Holding Corp., and Charles Schwab Corp. traded record amounts. Data show options trades placed by small investors has also sky-rocketed, and turnover in penny stocks has jumped, too.
The surge in activity has upended a longstanding relationship between stock and options markets, with implied volatility on the Nasdaq 100 rising even as the index marched to a new high. Its “fear gauge” has touched a 30-day high alongside the index itself hitting a multi-year high only twice before, according to Sundial Capital Research Inc. Both occurrences — in January 2006 and October 2007 — were followed by significant pullbacks.
Apple’s 4-to-1 split and Tesla’s 5-to-1 split have further accelerated day traders’ entry in the option space. While stock splits usually only cause a temporary bump in the share price, they’ve become more meaningful in the age of the day trader, according to RBC Capital Markets. Though fractional shares are available to individual investors, they don’t exist in the options market.
“While investors can own fractional shares, most cannot own fraction options,” wrote RBC derivatives strategist Amy Wu Silverman in a note Wednesday. “After the stock splits, retail will have more accessibility trading options in previously high-priced stocks.”
Ahead of their stock splits, the number of outstanding bullish call contracts were already rising. Total call open interest on Apple averaged more than 8 million in the seven days through the end of last week, compared with less than 5 million four months ago. Total call open interest on Tesla surpassed 4 million, up from 3.2 million in June.
The stock splits have given this year’s newly minted day traders a tool to hedge their trades, according to TD Ameritrade’s JJ Kinahan. While Apple and Tesla options were likely inaccessible previously, now an individual is able to sell calls to enhance returns or buy puts against a stock to protect performance, he said.
“It really allows the retail trader to be more involved in Apple and Tesla,” Kinahan, TD Ameritrade’s chief market strategist, said in a phone interview. “It does open up the options market to people and lets them start to use another financial tool.”
(Updates with SoftBank buying details in fourth and fifth paragraphs)
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