Speculative options trading on the rise as meme stocks rally

Speculative options trading on the rise as meme stocks rally

Traders work under the signs of GameStop Corp. NYSE: GME on the trading floor at the New York Stock Exchange NYSE in Manhattan, New York City.

NEW YORK - Speculative options trading is on the rise again among individual investors, alongside a rally in meme stocks, a trend that swept Wall Street last year but faded as markets turned volatile in 2022.

The average daily trading volume for single stock options, as well as a popular vehicle for retail investors looking to place leveraged bets in hopes of outsized gains, has gone up in recent weeks, with 10 day average daily trading volume at a more than six-month high of nearly 25 million contracts, according to Trade Alert data.

The rise in options trading came amid wild rallies in the shares of companies popular with retail investors, led by Bed, Bath Beyond, whose stock is up about 360% this month. More seasoned meme-stock names, such as GameStop and AMC Entertainment, have surged as well, rising 19% and 47% month-to-date. The S&P 500 is up 3.5% so far in August and has rallied nearly 17% from its June lows.

Steve Sosnick, chief strategist at Interactive Brokers, said that individual investors are engaged in options trading.

There is a disproportionate amount of growth in highly speculative names, meme stocks and the like. The S&P 500's worst first half loss since 1970 was dealt by worries over surging inflation and a hawkish Federal Reserve in the first half of the year, and the shares of many smaller or less profitable companies hit hard in the first half of the year.

Risk appetite in retail investors may be returning, but volumes are still down some 24% from a peak last November, as a result of the recent pickup in options trading.

On Wednesday, Bed Bath Beyond was the second most actively traded single-stock name with 1.4 million options contracts changing hands, topping market behemoths such as Amazon and Tesla.

The focus on Bed Bath Beyond was grew after a regulatory filing showed on Aug. 16 that activist investor and GameStop Chairman Ryan Cohen took a large bullish options position in the retailer's shares.

After a late filing showed that RC Ventures, owned by Cohen, filed a notice with the U.S. Securities and Exchange Commission on Wednesday, the shares of Bed Bath Beyond went up nearly 12%, but fell sharply in after-hours trading.

Other stocks that are popular with retail traders have attracted increased interest in the last few weeks, though not to the same extent. AMC's daily options volume is up 60% from the average for the rest of the year, and stands at 64,000 contracts month-to-date, up 60% from the average for the rest of the year.

According to VandaTrack, the rise in retail options trading has been accompanied by increased engagement in social media platforms where meme stocks are discussed.

Many market watchers have been skeptical of the rallies, despite the fact that past rebounds in meme stocks have failed, particularly in the first half of the year, which was followed by new lows in the broader markets.

Garrett DeSimone, head quant at OptionMetrics said it was the dog days of summer and we have had a bit of an easing of volatility. I wouldn't say it's a total change in risk aversion. Dan Pipitone, chief executive of retail brokerage TradeZero, noted that a surge in call buying is often viewed as a contrarian signal that points to a near-term top in markets.

Sosnick, of Interactive Brokers, said that the bounce that has taken broader markets higher starts to fade.

If we go down in a meaningful way, especially if we re-test the lows, that would mean that the greed would revert to fear, he said.