January 27, 2021 | Option Trading Helping To Fuel Stock Market Bubble

Good article on the frenzy of retail participants inflating stocks (and related capital loss prospects) with call options, see How option’s trading could be fuelling a stock market bubble.  Here’s a taste:

Since the sharp setback for tech stocks in September, retail traders have redoubled their interest in buying single-stock options, which have become especially popular among online amateurs who gather on Reddit and Discord to swap ideas and fawn over screenshots of both purported wins and gut-wrenching losses.

The momentum will probably last until markets turn down and these newly minted traders experience painful losses that, for many, will be the first in what has been an extremely short investing career.

Also, see FT:  Weaponised options trading

And, The Reddit GameStop Bubble is Just a Game–For Now:

There are two main causes of big market moves. The healthier one is when new information comes to light about a company, an industry or the economy at large, and financial assets are repriced to reflect it. The other is when market participants buy or sell in a rush, often because they suddenly need to protect their finances—in which case asset prices don’t convey much useful information.

The latter is at play now. Hedge funds’ short bets have been unsettled, forcing them to buy back the stocks to limit their losses. Also, punters have been using options contracts to prop up their targets. Such instruments can amplify even small market moves, because they force banks to take the other side and then hedge the risk by buying the actual underlying stocks. It can create a feedback loop: Those stocks then go up, and the value of the options tied to them increases even more, forcing banks to hedge further, and so on.

Danielle Park January 27th, 2021

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