Options traders are riding this year’s stock-market rally en masse, favoring bets on technology stocks to capture quick gains.
More than 40 million call-option contracts changed hands in a single day in early February—the highest level on record and nearly topping 2022’s daily average volume for puts and calls combined. That propelled overall activity above 68 million contracts, also a record, according to
data.
The frenzied activity in the options market piggybacks on major U.S. indexes’ rally to kick off the year. The S&P 500 has jumped 6.5%, while the tech-heavy Nasdaq Composite has added 12%.
Shares of technology and growth companies that floundered in 2022 have raced higher, and many traders are rushing to options that might profit if they kept soaring. Trading in calls tied to such tech and growth stocks has outstripped put options trading at the highest rate in nearly a year,
data show. That activity has driven overall single-stock volumes to similar highs, after falling flat last year.
Call options give traders the right, though not the obligation, to buy shares at a stated price by a certain date. Put options grant the right to sell.
Retail traders typically buy and sell options from institutional market-makers—such as Citadel Securities or Susquehanna International Group LLP—via brokerage accounts. Institutions servicing those trades typically don’t like to bet one way or another, so they often hedge their positions and look to profit from the difference between buying and selling prices.
Investors who had shed stocks heading into 2023 may be scooping up calls to profit from the recent rise in share prices, traders said. Many investors sold stocks last year—or made outright bets against major indexes—as they grew worried about rising interest rates and a possible recession.
“Because of that lighter positioning…people use shorter-dated call options to protect themselves against a rally,” said Stuart Kaiser, head of U.S. equity trading strategy at Citigroup.
Many individual investors are piling in, too. By one measure, individual traders have ramped up purchases of call options on single stocks to the highest level since August, according to
& Co. figures as of Feb. 3. The firm analyzed buy orders for call options relative to sell orders for trades with fewer than 10 contracts.
The fourth-quarter earnings season has led to whipsawing stock moves, drawing in many individual traders.
“Retail involvement always spikes around earnings events—they’re drawn to volatility,” said Layla Royer, senior equity derivatives salesperson at Citadel Securities.
This year’s options trading echoes the call options frenzy of 2021, when many turned to the trades to profit from the nearly relentless rally in the stock market. At the time, many traders had a fear of missing out, or FOMO, on further stock market gains, dishing out cash for trades that might double or triple their money if the market kept rising. And bullish trades tied to tech and meme stocks in particular were all the rage.
For example, trading in options tied to
Bed Bath & Beyond Inc.
shares has popped this year while the stock has gone on a wild ride. More than 500,000 contracts have changed hands on an average day in 2023, a fivefold surge from the past two years. One of the most popular trades has been for shares to jump to $45 by next week. The stock closed Friday at $2.35 a share.
“It’s a bit of a repeat of what we saw during the meme mania,” said Tobias Hekster, Chicago-based co-chief investment officer of
Sliding market volatility has created opportunities for traders to position for big moves in the stock market, Mr. Hekster said. Options prices often fall along with market volatility.
Activity in the options market ballooned during the Covid-19 pandemic, with volumes more than doubling since the start. It has shown no signs of deflating: Roughly 46 million contracts are changing hands on an average day in 2023, nearly 12% higher than last year.
Options activity tied to shares of
Apple Inc.,
Meta Platforms Inc.
and
Tesla Inc.
has touched some of the highest levels in history in recent weeks, Cboe data show. That includes a frenetic session for Meta in February when shares surged 23% and call options significantly outpaced puts.
Shares of all three companies have raced higher in 2023 after one of their worst years on record, with Apple and Meta jumping 16% and 45%, respectively. Tesla shares have added 60%.
Bullish call options trading tied to
Cathie Wood
‘s
exchange-traded fund has also bolted to highs this year.
Trading in options tied to single stocks is a “significant driver of increased activity this year,” said Citadel’s Ms. Royer.
Trades tied to indexes such as the S&P 500 and Nasdaq-100 have also been popular. Individuals have traded index-level bets alongside their institutional peers—nearly one in 10 options trades tied to the S&P 500 involve just a single contract, Cboe data show.
Derivatives traders aren’t the only ones pouncing on this year’s rally—both active investors and quant strategies have boosted their stock-market exposure to the highest levels in nearly a year.
Write to Eric Wallerstein at eric.wallerstein@wsj.com and Gunjan Banerji at gunjan.banerji@wsj.com
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