Speculative options trading is on the rise again among individual investors alongside a rally in so-called meme stocks, reviving a trend that swept Wall Street last year but faded as markets turned volatile in 2022.
Trading in single stock options – a popular vehicle for retail investors looking to place leveraged bets in hopes of outsized gains – has shot higher in recent weeks, with 10-day average daily trading volume at a more than six-month high of nearly 25 million contracts, Trade Alert data showed.
The rise in options trading comes amid wild rallies in the shares of companies popular with retail investors, led by Bed, Bath & Beyond Inc., whose stock is up about 360 per cent this month. More seasoned meme-stock names such as GameStop Corp. and AMC Entertainment Holdings Inc. have surged as well, rising 19 per cent and 47 per cent, respectively, month-to-date. The S&P 500 is up 3.5 per cent so far in August and has rallied nearly 17 per cent from its June lows.
“It’s clear that individual investors are re-engaged in options trading,” said Steve Sosnick, chief strategist at Interactive Brokers.
“Certainly a disproportionate amount of the growth is in highly speculative names, meme stocks and the like.”
Shares of many smaller or less profitable companies were hit hard in the first half of the year, when worries over surging inflation and a hawkish Federal Reserve dried up risk appetite and dealt the S&P 500 its worst first half loss since 1970.
The recent pickup in options trading is one sign that risk appetite among retail investors may be returning, although volumes are still down some 24 per cent from a peak hit last November.
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 Tesla Inc. and Amazon.com Inc.
The focus on Bed Bath & Beyond grew after a regulatory filing showed on Aug. 16 that activist investor and GameStop chair Ryan Cohen took a large bullish options positions in the retailer’s shares.
Bed Bath & Beyond shares closed up nearly 12 per cent on Wednesday, but fell sharply in after-hours trading, after a late filing showed RC Ventures, owned by Mr. Cohen, filed a notice with the U.S. Securities and Exchange Commission for the proposed sale of 9.45 million shares, including options.
Other stocks popular with retail traders have also drawn increased interest in recent weeks, though not to the same extent. AMC daily options volume, for instance, stands at about 64,000 contracts month-to-date, up 60 per cent from the average for the rest of the year.
The rise in retail options trading has been accompanied by increased engagement in social media platforms where meme stocks are discussed, according to data from VandaTrack, another sign that individual investors are growing bolder.
Still, many market watchers have been skeptical of the rallies, noting that past rebounds in meme stocks have fizzled, particularly a run in the first half of the year that was followed by new lows in broader markets.
“It’s the dog days of summer and we have had a little bit of easing of volatility,” said Garrett DeSimone, head of quantitative research at OptionMetrics. “I wouldn’t say it is a total change in risk aversion.”
Daniel 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.
Much depends on whether the bounce that has taken broader markets higher starts to fade, said Mr. Sosnick, of Interactive Brokers.
“If we start to go down in a meaningful way, particularly if we re-test the lows, that would mean the greed would revert to fear,” he said.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.