Retail Traders Are Piling Into Viral Options Calls at All-Time High Level

Jan 26, 2021

Observations & Insight

Sarah Ponczek of Bloomberg News shared on Twitter that 32 million call options traded yesterday, the second most on record, only behind a day last November.

Lead Stories

Retail Traders Are Piling Into Viral Options Calls at All-Time High Level
Vildana Hajric and Katherine Greifeld – Bloomberg
It’s a racetrack adage that nobody has ever bet enough on a winning horse. In the options market, they keep trying.
Flush with winnings in stocks like GameStop Corp. and Tesla Inc., the smallest options traders, those who buy or sell 10 or fewer contracts at a time, have piled into record bullish bets in the last three weeks, adding nearly 60 million call options, according to data compiled by Sundial Capital Research. That’s 20% above the volume late summer, itself a period of unprecedented exuberance.

How Options Trading Could Be Fueling a Stock Market Bubble
Matt Phillips – NY Times
The stock market is near record highs, and optimism abounds. Coronavirus vaccines are finally being jabbed into arms. Interest rates are at historic lows. And the Democrats who control Washington are expected to pour another trillion dollars or so into the still-struggling economy.
But it’s getting increasingly difficult to overlook signs that investors are taking things too far, too fast.

All the Reasons VIX Is Sounding Alarms as Greed Engulfs Markets
Yakob Peterseil – Bloomberg
Fears unleashed by the once-in-a-century pandemic are clinging onto volatility markets even as stocks boom to record highs and Wall Street speculators gorge on every risk.
For all the euphoria in markets, the Cboe Volatility Index has stayed elevated in an historic divergence between this gauge of investor fear and rallying equities. The VIX hasn’t closed below 20 since February last year. Its current level of 23 is some six points above the decade average.
As Dean Curnutt at Macro Risk Advisors puts it, the VIX is “on an island of its own.” And there are no easy explanations.

Increased retail trading is ‘largely responsible’ for elevated stock prices and record-high options activity, says Deutsche Bank
Emily Graffeo – Markets Insider
Deutsche Bank is seeing signs that individual investors are driving recent stock rallies and options activity.
Average call volumes over the last three months have hit a new peak, exceeding the 2009 high, and the size of the contracts suggests that it’s driven by retail investors, said a team of strategists led by Binky Chadha in a recent note.

Why an options-trading frenzy by small traders stirs memories of the stock market’s dot-com bubble
William Watts – MarketWatch
Individual investors are back in love with the stock market, but a newfound passion for options are making some market veterans nervous.
“What we have seen is a focus on short-term, out-of-the-money call options because they have these lottery-like payoffs,” said Garrett DeSimone, head of quantitative research at OptionMetrics, an options database and analytics provider for institutional investors and academic researchers.

FX Markets Lull Draws Traders Into a Bet That Went Awry in 2020
Vassilis Karamanis – Bloomberg
Once again, currency traders are starting the year by loading up on bets for lower volatility. But it’s already beginning to look a bit too one-sided to last.
In a repeat of an option-market pattern seen since 2017, investors are showing a clear preference for shorting volatility early in the year. The reasoning appears to be the same now as it was then: central banks are expected to refrain from changing their policy mix and to continue with accommodative biases, helping keep currencies in tight ranges over the medium term.

One Reddit day-trader turned $53,566 in GameStop call options into more than $11 million in just over a year
Shalini Nagarajan – Markets Insider
A day-trader on popular Reddit community WallStreetBets has claimed they scored an enormous gain on GameStop’s controversial 261% rally this year.
The user going by ‘DeepF—–gValue’ – censored for content – showed he turned an initial investment of $53,566 in GameStop call options into a stack of $11.2 million.

The ‘ice is cracking’ on the bull market, one stock-market analyst warns
Mark DeCambre – MarketWatch
U.S. stocks have been hanging around record highs recently amid broader participation by individual investors, but now cracks are starting to form in the foundation of the bull market, according to technical analysts at SentimenTrader.
The biggest breakdowns in the positive trend for markets tend to come when fewer stocks are helping to drag benchmarks toward fresh records, the analysts say

Exchanges and Clearing

Cboe expands ETP incentive scheme options for market makers; The expanded program will provide more incentive options for market makers in ETPs on Cboe BZX Exchange from 1 February.
Annabel Smith – The Trade
Exchange operator Cboe Global Markets has confirmed plans to launch a new exchange-traded product (ETP) incentive scheme for market makers on 1 February. The scheme is an extended version of its existing program, which encourages lead marker makers (LMMs) to provide liquidity in newly launched or thinly traded ETPs by awarding them a flat daily fee instead of payment based on transaction volume.

Optiver becomes first non-bank options market-maker on FXall; Dutch e-trading firm joins OTC FX options platform in a market taking electronic baby steps
Robert Mackenzie Smith –
Listed options liquidity provider Optiver has become the first FX options non-bank market-maker on foreign exchange trading platform FXall. The move marks another milestone in the evolution of the over-the-counter FX options market – a market making ponderous progress toward electronic trading. The market-maker joins more than 66 other firms now providing electronic options liquidity on FXall, which has traditionally been a haven for banks dealing FX options to clients. Overall volumes on the To continue reading..

Regulation & Enforcement

‘Big bang’ end for Libor could overload markets, bankers say
Huw Jones – Reuters
A “big bang” end for interest rate benchmark Libor in December this year could leave banks and their customers struggling to switch trillions of dollars worth of transactions to an alternative, bankers said on Tuesday.
Libor, the London Interbank Offered Rate, used to price everything from mortgages and credit cards to derivative contracts, will be scrapped on Dec. 31 after banks were fined for trying to rig it.


Matrix Executions Announces 2021 Plans After Quadrupling Volumes and Increasing Market Share in 2020; Firm completes record year in revenues, product development, client acquisition, and volume executed, with several client-requested solution rollouts planned for Q1 2021
Matrix Executions, LLC
Matrix Executions, LLC (“Matrix”), a broker-dealer specializing in trading workflow automation and execution, today laid out the road ahead for the firm on the heels of a successful 2020. Matrix captured an increased percentage of market share of the options industry’s record-setting volumes in 2020, and with the expected delivery of additional product offerings in 2021, anticipates to continue that success.


Katten Adds Ex-CFTC General Counsel to Financial Markets and Funds Group
Katten announced today that Daniel J. Davis, formerly general counsel for the Commodity Futures Trading Commission (CFTC), has joined the firm’s Financial Markets and Funds group as a partner in its Washington, DC office, expanding Katten’s industry-leading proficiency in derivatives regulation and raising the award-winning group’s global profile.

*****JJL: Congratulations to Dan Davis on joining the great crew at Katten.


GameStop Whipsawed by 150% Swing as Day Traders, Shorts Feud
Bailey Lipschultz and Gregory Calderone – Bloomberg
GameStop Corp.’s wild ride since the start of the year may have crested on Monday when the stock erased an intraday surge of as much as 145%.
The video-game retailer that has taken Reddit and Wall Street by storm briefly turned negative as it seemed the stock’s unrelenting surge could buckle. The stock, which has been a battleground for short sellers and retail traders, triggered at least nine trading halts for volatility on Monday.

Tencent Shares Tumble After Approaching $1 Trillion Valuation
Sofia Horta e Costa – Bloomberg
Tencent Holdings Ltd. slumped after a world-beating surge in the stock pushed its market value to the cusp of $1 trillion for the first time.
The Chinese Internet behemoth lost 6.3% in Hong Kong on Tuesday, putting its market capitalization below $890 billion. Traders took profit after Monday’s 11% rally, which was Tencent’s biggest in almost a decade. Adding to the caution were comments by an adviser to China’s central bank at a conference, reported by local media, indicating that excessive liquidity was creating asset bubbles.

Large Bitcoin Options Positions May Boost Price Volatility This Week
Omkar Godbole – CoinDesk
Bitcoin’s options market continues to grow along with an institutional-led bull run in the leading cryptocurrency. Yet, while many use options to hedge their positions, the large amounts of bitcoin options slated to expire in a few days may themselves lead to wild price swings as January draws to a close.


BOCA-V: International Futures Industry Conference
As our flagship event, Boca draws on FIA’s global reach to bring together some of the most diverse voices and leaders within the cleared derivatives industry. This year’s virtual programming centers around three key themes: markets, innovation and sustainability. These themes will dive into how the markets are evolving in the wake of the crisis, which innovations will drive market efficiency and what measures will maintain financial stability while addressing climate change. We’ve created a multitude of networking opportunities optimized for connecting, even while we’re apart. And, FIA is bringing Boca-V to our members gratis, thanks to the generosity of our sponsors. Join us 16-18 March as we power new strategies, drive relationships forward and explore challenges shaping our markets in 2021 and beyond.

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