November 22, 2021 BARRON’S 13
an equity analyst at Piper Sandler.
Calls give holders the right to buy a
stock at a fixed price for a period, and
amount to a bullish bet. Puts, which
allow investors to sell a stock at a fixed
price, are bearish bets. Each contract
covers 100 shares of stock.
Equity call volume topped 37 mil-
lion contracts on Nov. 5, just shy of the
record 39 million contracts on Jan. 27,
after averaging 20 million to 25 mil-
lion contracts daily from March
through September. Reflecting the
bull market, call volume on individual
stocks is regularly running at double
therateofputvolume.Oflate,the
most popular individual stocks for call
options have been Tesla, Apple,Ford
Motor(F),Advanced Micro De-
vices(AMD), andNvidia(NVDA).
Given its recent volatility and
prominence, Tesla has been a favorite
of options investors. One sign of the
heavy day trading in Tesla options is
that high volume in the company’s call
options generally translates into little
change in open interest, or the num-
ber of outstanding contracts.
Day trading in options on volatile
stocks can be enticing, but those
options are pricey. And the value of
short-dated options in particular can
erode very quickly, absent a signifi-
cant move in the stock.
It can also be tough for day traders
to capture big moves in individual
stocks—and the overall market—
during the trading session.
Big changes in many stocks often
happen on the opening trade, as inves-
tors incorporate news occurring since
the prior session, such as earnings
reports. Tesla was recently up 45%
year to date, and 42 percentage points
of that cumulative move came over-
night against three points during the
day, Susquehanna data show.
Historically, nearly all of the net
change in the S&P 500 index has oc-
curred with the opening trade. Since
1993, the index is up 745% overnight,
based on the opening trade, and down
about 9% during the trading day. So far
this year, the returns have been more
balanced, with the index up 13.7%
overnight and 9.9% cumulatively
during the day, Susquehanna says.
Options trading has an impact on
the overall market, but in ways that
may be more psychological and
nuanced.
“The actual option volume on a
daily basis and how much that
impacts the stock—I think that is po-
tentially overstated,” says Chris Mur-
phy, co-head of derivative strategy at
Susquehanna. “The flip side is there
is a psychological and signaling effect
that may be understated. When call
option volume surges and gets talked
about on CNBC and in articles inBar-
ron’sand The Wall Street Journal, and
starts trending on Twitter, if you’re a
momentum-based trader, whether
you’re institutional, retail, or quantita-
tive, you’re going to look at it, and
you’re more likely to buy the stock.”
The big moves in stocks like Game-
Stop, Tesla, and recentlyAvis Budget
Group(CAR) are resulting in options
pricing that is different than in the
past. So-called out-of-the-money calls
on some individual stocks, which re-
quire a big move for an option payoff if
held to expiration, are pricier than out-
of-the-money puts, a reverse of the
historical pattern. One example:Mara-
thon Digital Holdings(MARA).
“People used to be more afraid of
a stock crashing, not doubling, but
we’ve seen more stocks double or
triple than get cut in half, and that has
shifted the way options are priced,”
says Henry Schwartz, senior director,
head of product intelligence at Cboe
Global Markets.
Oppenheimer chief options strate-
gist Michael Schwartz, now 79, has
been in the business for 56 years—
since before there were listed options.
“Options are a tool to reduce risk,
not increase it, but that’s not what’s
happening,” he says.B
TheNewDayTrading
IsinOptions.HowIt
MovestheMarket.
Equity option volumes are nearing the levels reached during the meme-
stock frenzy in January. Investors need to be aware of the risks.
H
ot stocks likeTeslaand
Applehave become even
hotter as stock option
speculators sweep back
into the market. Many
are retail investors hold-
ing their positions for
less than a day. This new day-trading
frenzy in options is helping lift indi-
vidual stocks and bolstering the reve-
nue of online brokers like Robinhood.
“Small retail traders are back buy-
ing lottery tickets on the rally again,”
says Jason Goepfert, the founder of
Sundial Capital Research, whose
SentimenTrader newsletter tracks
measures of speculative trading.
Earlier this month, total equity
options volume reached 56.5 million
contracts—the second-highest total
ever, behind the 59.2 million contracts
traded on Jan. 27 at the height of
the meme-stock craze involving
GameStop(ticker: GME),AMC En-
tertainment Holdings(AMC), and
others. “We’re back challenging those
speculative peaks,” Goepfert says.
Retail traders tend to prefer lower-
priced options. That is apparent in
a preference for cheaper—and more
speculative—options with short ma-
turities. About 40% of options trading
volume on individual stocks is in con-
tracts expiring within a week and 54%
within two weeks, according to the
Susquehanna Financial Group. In
stocks like Tesla (TSLA) and Apple
(AAPL), as much as 65% of trading
volume is in options expiring within a
week.
“Options have become more impor-
tant in the mix of retail trading than
ever before,” says Richard Repetto,
By ANDREW BARY
Top Calls
Here are the stocks with the highest average
trading volume in calls, or options to buy a
stock at a fixed price for a period of time.
Avg Daily
Company / Ticker Call VolumeTesla / TSLA 1,129,Apple / AAPL 885,Ford Motor / F 594,Advanced Micro Devices / AMD 587,Nvidia / NVDA 470,Meta Platforms (Facebook) / FB 439,AMC Entertainment 358,
Holdings / AMCPfizer / PFE 299,Amazon.com / AMZN 261,Microsoft / MSFT 257,Note: Call volume for the 20 trading days through Nov. 15
Illustration by Ben Mounsey-Wood Sources: Bloomberg; Susquehanna Financial Group
“People used
to be more
afraid of
astock
crashing,
not
doubling.”
Henry Schwartz,
senior director,
head of product
intelligence at the
Cboe Global
Markets.