These individual investors had embraced options as a way to capitalize on the stock market momentum that drove stocks of companies from Apple Inc. to Nvidia Corp..
to new heights. Now, the Federal Reserve’s decision to raise interest rates to control inflation has reversed that momentum, sending stock prices skidding.
Retail investors accounted for 26% of total options activity in March, up from nearly 30% at the start of last year. That marked the lowest level since March 2020, although it is still well above pre-pandemic levels, according to calculations by Larry Tabb of Bloomberg Intelligence, who analyzed figures from the 12 largest online brokerages.
Meanwhile, their share of stock trading activity hit a low of 10.7% in January, according to data from the largest brokers. Activity has increased slightly since then, but remains below last year’s levels, when it peaked at 21%.
A period of painful volatility prompted many individual investors to abandon a host of dynamic transactions such as blank check companies known as SPAC, crypto games like non-fungible tokens, and unprofitable technology companies. Risk aversion has spilled over into the markets, sending the S&P 500 down 16% this year. Many pandemic-era darlings like Netflix Inc.
and PayPal Holdings Inc..
fell much further.
“There was real herd behavior” last year, said Viraj Patel, global macro strategist at Vanda Research in London. “It’s really hard to choose who is going to win in this environment.”
Over the coming week, investors will analyze comments from Federal Reserve speakers as well as data on the housing market and consumer spending for clues about the path of interest rates and the economy. . The Fed has become the driving force in the markets as many investors fear its quest to control inflation could result in a recession. They are also concerned about the war in Ukraine, lockdowns in China and continued supply chain disruptions around the world.
Against this backdrop, the share of bullish call option trades by individual investors plunged to the lowest level since April 2020, another sharp reversal since the start of the pandemic. Investors had rushed to pick up options tied to companies like electric vehicle maker Nio Inc. and GameStop Corp..
as a way to boost their bets that the shares would continue to rise. These trades have lost popularity as stocks have fallen 55% and 34%, respectively, this year.
“Last year I would have been a lot more aggressive,” Steve Dez, a 30-year-old actor who travels between California and Puerto Rico, said of his options trading. This year, “the momentum is running out of steam faster”.
Calls give investors the right, but not the obligation, to buy shares at specific prices on a specific date. Since options allow traders to deposit a relatively small amount of money for potentially huge returns if their bets are right, investors can use them to magnify their winnings. However, options may expire worthless and investors may lose their initial investments.
“Across the industry, [retail] options volume has kind of been on the back end,” said Shawn Cruz, chief trading strategist at TD Ameritrade. “Retail clients are moving away from single name equity options and towards broader, macro options like [exchange-traded funds] and index options.
Individual investors have also increased their exposure to exchange-traded funds, according to data from Vanda Research. Funds that track the S&P 500 and Nasdaq-100 indices, as well as those offering turbocharged exposure to tech stocks, have been among the most popular. This helped ETF purchases by individual investors hit an eight-year high in early May.
Paul Soucy, a 65-year-old retired teacher on Cape Cod, said he stopped trading in stocks of memes like AMC Entertainment Holdings Inc..
and SPAC to buy stocks of consumer staples like snack company Mondelez International Inc..
and dividend-paying stocks that he says will do well as inflation soars.
Mr Soucy said he was alarmed by some of the sharp post-earnings declines in individual stocks, making the market more unpredictable and harder to trade options and stocks.
“The market has been a bit crazy,” Mr. Soucy said. “Some months I wasn’t doing so well.”
Of course, some of last year’s strategies have retained their appeal. Many individual investors have continued to buy into the stock market decline this year, fueling record amounts of buying. Even stocks of memes have sometimes come back with a vengeance. And buying big tech stocks remains popular despite the volatility, according to Vanda Research.
One trade, in particular, shows no signs of slowing down. Options on Tesla Inc..
remained the most popular among individual investors this year, Vanda Research estimates, just as they were last year. Shares of the company have fallen 27% this year.
Write to Gunjan Banerji at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8