Individual Investors Step Back From Options Bets

Those individual investors have embraced options as a way of boosting the stock market, boosting shares of companies from Apple Inc. to Nvidia Corp.

to new heights. Now, the Federal Reserve’s move to raise interest rates to curb inflation has reversed that momentum, sending stock prices sliding.

Individual investors accounted for 26% of total options activity in March, down from nearly 30% at the beginning of last year. That’s the lowest level since March 2020, although still well above pre-pandemic levels, as calculated by Larry Tabb of Bloomberg Intelligence, who analyzed figures from 12 of the largest online brokers. .

Meanwhile, their share of stock trading activity hit a low of 10.7% in January, based on data from the largest brokerages. Activity has picked up slightly since then but remains below last year when it peaked at 21%.

A wave of severe volatility has led many individual investors to abandon a variety of momentum trades such as empty check companies known as SPACs, crypto operations such as unavailable tokens and technology companies are not profitable. Risk aversion has hit the markets, dragging the S&P 500 down 16% this year. Many darlings of the pandemic era like Netflix Inc.

and PayPal Holdings Inc.

has decreased even more.

“There was a real herd behavior last year,” said Viraj Patel, global macro strategist at Vanda Research in London. “It’s really hard to choose who will win in this environment.”

Over the next 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 market, with many investors fearing the Fed’s quest to contain inflation will lead to a recession. They are also worried by the war in Ukraine, the lockdown in China and continued global supply chain disruptions.

As a result, the share of bullish call options trading by individual investors has fallen to its lowest level since April 2020, another sharp reversal since the outbreak of the pandemic. Investors have rushed to look for options involving companies like electric vehicle maker Nio Inc. and GameStop Corp.

as a way to increase their bet that the stock will continue to rise. Those deals have fallen in popularity as the stock is down 55% and 34% this year, respectively.

“Last year, I was going to be much more aggressive,” said Steve Dez, a 30-year-old actor who has traveled between California and Puerto Rico, of his options trading. This year, “falling momentum slightly faster.”

Calls give investors the right, but not the obligation, to buy shares at a specific price on a set date. Because options allow traders to fork out a relatively small amount of cash for huge profits if they bet right, investors can use them to increase their profits. However, options may expire worthless and investors may lose their initial investments.

“Across the industry, [retail] Shawn Cruz, trade strategist at TD Ameritrade said. “Retail customers are moving away from single-name options and into broader, macro-based options like [exchange-traded funds] and index options. ”

Individual investors are also increasing their exposure to exchange-traded funds, according to data from Vanda Research. Funds that track the S&P 500 and Nasdaq-100 indexes, along with those that provide exposure to technology stocks, are among the most popular. That helped individual investors’ ETF purchases hit an eight-year high in early May.

Paul Soucy, a retired 65-year-old teacher in Cape Cod, said he has switched from trading meme stocks like AMC Entertainment Holdings Inc..

and SPAC to buy shares in consumer staples such as snack company Mondelez International Inc.

and dividend stocks that he thinks will do well when inflation soars.

Mr. Soucy said he was worried about certain individual stocks whose earnings fell sharply, making the market more unpredictable and making it harder to trade options and stocks.

“The market is crazy,” Mr. Soucy said. “Some months I didn’t do very well.”

Of course, some of last year’s strategies still retain their appeal. Many individual investors have continued to buy as the stock market has fallen this year, spurring record buying. Even meme stocks bounce back from time to time. Buying big tech stocks remains popular despite the volatility, according to Vanda Research.

Specifically, a deal shows no signs of cooling down. Options on Tesla Inc.

Vanda Research estimates it remains the most popular form for individual investors this year, as it was last year. The company’s shares are down 27% this year.

Write to Gunjan Banerji at

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