By Gunjan Banerji
Investors are piling into bets that will profit if stocks
continue their record run.
Options activity is continuing at a breakneck pace in January,
building on 2020's record volumes. It is the latest sign of
optimism cresting through markets as individual and institutional
investors pick up bullish options to profit from stock gains and
abandon bearish wagers.
More than half a trillion dollars worth of options on individual
stocks traded on Jan. 8 alone, the highest single-day level on
record, according to Goldman Sachs Group Inc. analysts in a Jan. 13
Among the most popular bets were those tied to Tesla Inc.,
Amazon.com Inc., Apple Inc. and Nvidia Corp. And bullish
call-options trading surged to a high on Jan. 14, with about 32
million contracts changing hands, according to data provider Trade
Options are contracts that give investors the right to buy (a
call option) or sell (a put option) shares, at specific prices,
later in time. They are typically used to bet on stocks' direction
or hedge portfolios. Although they can be risky to trade for
amateur investors, activity has exploded in recent months. The
interest has stemmed in part from investors looking to magnify
gains in the stock market, since options allow them to put down a
relatively small sum for the chance at an outsize return.
Many of these investors have flocked to online brokerages that
have made it easier than ever to trade. Smaller options trades of
just one contract -- typically thought to stem from individual
investors -- recently made up almost a tenth of activity, up from
2% three years ago, according to Trade Alert data.
The robust trading comes as U.S. stocks have jumped to fresh
highs. Earnings results have poured in over the past week, with
companies such as Netflix Inc. and Goldman Sachs posting strong
results. In the coming week, traders will be monitoring a slate of
releases from big tech companies, with Microsoft Corp., Apple,
Facebook Inc. and Tesla on deck.
Investors have also looked ahead to the prospect of fresh
stimulus that would help the struggling economic recovery. In
January, stocks have built on their big, and perhaps unexpected,
gains of 2020: The S&P 500 has gained 2.3%, setting four
closing highs, after rallying 16% last year. The stock-market rally
has also broadened, lifting laggard sectors like financials and
Ben Austin, a 21-year-old student at Syracuse University, said
he has increased his positions in stocks such as American Express
Co. and Citigroup Inc., in part because of the chance for more
fiscal stimulus, which he thinks could boost spending.
"For the next couple months, I'm still kind of bullish on the
market," Mr. Austin said. "I think we're going to see another giant
He started trading options in November and primarily trades
calls to position for big events that have the potential to lift
stocks, shying away from put options. He acknowledges that options
can be riskier than stocks but relishes trading.
"There's somewhat of a thrill to the more risk aspect of it,"
Mr. Austin said. "There's way more potential for higher gains in a
shorter amount of time."
As stocks have continued their ascent and bullish positions have
flourished, many have ditched bearish bets on the market.
Short interest in one of the biggest exchange-traded funds tied
to the S&P 500 recently hit the lowest level since March 2020,
according to data from IHS Markit. Investors that short shares
typically borrow stocks and sell them, in the hopes of buying them
back later at a lower price before returning them to the lender.
These positions profit when stocks tumble. And bearish put options
outstanding tied to the gauge recently fell to the lowest level in
at least four years, Trade Alert data show.
"This is the most popular I've seen call buying in my career,"
said Jon Cherry, global head of options at Northern Trust Capital
Markets, who has been in the industry for more than two decades.
"Where I think that is really driving from is kind of the melt-up
that we've seen in broader markets."
Mr. Cherry said he has noticed interest in bullish positions as
well as a desire to sell bearish options to juice income. Investors
don't want to miss out on any potential stock-market gains to come
and want to stay in positions that will profit if stocks keep
soaring, he said.
Hayden Cole, 22, a student at the College of the Canyons in
California, waded into stocks and options after he lost his job
during the coronavirus pandemic. He started chatting with his
father about the stock market.
"He told me the stock market always recovers. It'll always go
back up," Mr. Cole said.
He said he bought shares of fuel-cell company Plug Power Inc.,
an exchange-traded fund tied to the S&P 500 and the ARK
Innovation Exchange-Traded Fund, which tracks shares of companies
such as Tesla and Roku Inc., in May. Lately, he has placed bullish
options trades on companies like Advanced Micro Devices Inc. and
The S&P 500 has soared 36% since May, while the ARK fund has
To some, the current environment is reminiscent of August, when
stocks such as Tesla and Apple soared after their stock splits and
a seemingly insatiable enthusiasm for stocks and options swept
through the market, helping drive stocks to highs. The summer
euphoria was followed by a 7.2% drop in the Nasdaq Composite in
JPMorgan Chase & Co. analysts said in a Jan. 8 note that
call-option buying was prominent among individual investors, based
on an analysis of trading activity made up of fewer than 10 options
contracts. This call buying could lead to a rise in volatility,
driven by options hedging, they said.
And at times, overwhelming momentum in individual stocks such as
GameStop Corp. has coincided with a surge in options activity. As
the stock skyrocketed 51% on Friday, options activity tied to the
company jumped to the highest level ever.
Options traders appear to be positioning for bigger gains for
some of the sector's star performers ahead of their earnings
reports this week. An options measure called skew, which measures
the cost of bullish options relative to bearish ones, is near the
lowest levels of the past year on stocks such as Apple, Advanced
Micro Devices and Facebook, Trade Alert data show.
"People are always looking in the rearview mirror," said Joanne
Hill, chief adviser for research at Cboe Vest, which oversees
options-based strategies. "They're looking at the returns that had
been achieved if they bought a call option on a stock six months
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
January 24, 2021 05:44 ET (10:44 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.