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Passion for Options

Passion for Options

| February 08, 2021

Individual investors are entering the market in droves and their newfound passion for options is making some market veterans nervous.  Garrett DeSimone, head of quantitative research at OptionMetrics stated, “What we have seen is a focus on short-term, out-of-the-money call options because they have these lottery-like payoffs.”  Buying deeply out-of-the-money calls is usually a losing proposition.  But some of those bets have paid off in dramatic fashion, with the buyers posting their gains on sites such as Reddit, Twitter and Instagram.  Average daily call volumes over the past three months have hit a new peak, with the bulk of the increase driven by “very small” contract sizes, according to analysts at Deutsche Bank.  A combination of YOLO (You Only Live Once – the battle cry of many on reddit’s wallstreetbets forum), and FOMO (Fear of Missing Out – a powerful motivator in its own right) seem to be the ingredients of this powerful cocktail of market froth. The chart below, from Deutsche Bank, shows that “Small traders” overtook all others in April of last year, and never looked back.  By January of this year, there were twice as many “small trader” bullish options contracts outstanding compared to the other categories.

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Jeffrey Cerny