Higher Rates, Tech Selloff Fuel Options Boom

The Wall Street Journal2023-01-09

While Nvidia shares closed at $148.59 Friday, investors could exercise put option contracts set to expire in coming weeks at $170 or above.Investors trying to capitalize on higher interest rates and ...

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QQChai
2023-01-09
QQChai
OK
soosoo
2023-01-09
soosoo
Ok
Benzz
2023-01-09
Benzz
Ok
- Rickyt089:
  Oki
crtyn
2023-01-09
crtyn
Ok
- Yao84:
  Ok
- Mumaizah:
  ok
- Benzz:
  Ok

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green up pointing trianglelost about half of their value in the past year, raising the worth of some options tied to those shares. Theirshare declines have been much steeperthan many investors wagered, creating a mountain of deep in-the-money put option contracts—or those that allow investors to sell the shares at a price that is now far above current levels.On Jan. 9 at 12:30 p.m. ET, San Francisco Fed President Mary Daly joins Nick Timiraos, The Wall Street Journal’s chief economics correspondent, to discuss her outlook for the economy, inflation and interest rates in 2023.Nvidia shares, for instance, closed Friday at $148.59. Yet tens of thousands of put option contracts set to expire in the coming weeks could be exercised at $170 or above.Eyeing quick returns, many traders are selling contracts to reinvest the premium in ultrasafe short-term investments such as repurchase agreements that now offer their most attractive yields in more than a decade.The trades helped push the weekly amount spent on new put option purchases and sales above $40 billion four times in the fourth quarter, according to an analysis of Options Clearing Corp. data by derivatives-analytics firm SpotGamma. That compares with a weekly average of less than $10 billion through the first three quarters of 2022.Put options give traders the right, though not the obligation, to sell shares at a stated price by a certain date, while call options grant the right to buy.Brent Kochuba, founder of SpotGamma, describes the trade as an “arbitrage play” among big Wall Street firms. Activity gained steam in the latter half of 2022, during which the Federal Reserve increased its benchmark interest rate to above 4% from below 2%.“Megacap tech names have been beaten down, so there’s tons of put options that are now deep in the money,” he said. “Once interest rates surged, market makers piled in.”Although the amount of money that traders spent on options soared, the number of contracts traded rose by less than one-fifth, a shallow increase that suggests expensive puts, such as those that are deep in the money, were the ones changing hands.The options market as a whole has boomed in recent years, partly driven by individual investors who are lured by small upfront costs and quick potential payoffs. Trading activity set another record last year, with more than 41 million contracts changing hands on an average day.Short-dated options that allow traders toturbocharge wagershave surged in popularity recently. Trading of deep in-the-money contracts more than doubled to nearly 11% of daily average stock-options volume in the fourth quarter from a multiyear average around 5%, according toHenry Schwartz, senior director and head of product intelligence at the exchange Cboe Global Markets.Options trading is inherently risky. Typically, investors buy options to wager on the trajectory of a stock or index for a fraction of what it would cost to buy the security outright. The risk of selling is far greater—a trader could be on the hook to pay several times more than the initial cash they receive.The risk tied to the recent whirlwind of put options activity is different. Traders targeting deep in-the-money puts pay an initial outlay, then hope they aren’t forced to buy shares that eat up their capital when the bank or party on the other side of the trade exercises the options.“Firms will have a number of different objectives, and trade a variety of structures with slightly different exposures, but they are all going after the in-the-money puts,” saidJohn Zhu, U.S. head of trading at market maker Optiver in Chicago. Mr. Zhu noted that some traders might be looking to damp down existing exposures, rather than add new ones.One consequence of the boom in activity is in the ratio of equity put options to call options changing hands on Cboe. The ratio, traditionally seen as a measure of investor angst, recently rose to 2.4, after breaching 1.5 for the first time ever in December, according to Dow Jones Market Data.Despite the appearance of fear, other indicators suggest that options protecting from market turmoil are inlow demand. The Nations TailDex, which measures the cost of put options that would pay out in a major S&P 500 decline, recently hit a near-decade low.“Common thinking is that high readings in the Cboe equity put-call ratio suggest fear is rampant, because traders are purchasing a large number of puts,” Mr. Kochuba of SpotGamma said. “Occasionally, this can be correct. In this case, it is 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