Retail trading fever drives U.S. equity option volumes to record monthly high

By Thyagaraju Adinarayan

LONDON, Feb 3 (Reuters) - Trading volumes in U.S. equity options surged 70% to hit a record monthly high in January, data from Options Clearing Corporation showed, as a retail share trading boom drove extreme gains in some small-cap stocks such as GameStop .

The use of such derivatives, which allow holders to buy shares at pre-determined prices, has ballooned over the past year amid COVID-19 lockdowns as they became more popular with small-time investors, who often trade from home on their phones.

In particular, retail investors have piled into call options on individual stocks.

"Call option buying appears to have risen sharply to new record high levels last week pointing to acceleration of the retail impulse," JPMorgan wrote in a note, saying it expects the trend to slow rather than accelerate further from here on.

The surge in equity options was in stark contrast to a 12.4% drop in index option volumes in January, OCC data showed, indicating bets were largely in single stocks rather than the overall market.

Buying call options in a company lets investors take bigger risks than by simply acquiring shares. Options can be worthless when they expire but, conversely, there's theoretically no limit to how much their value can rise, and holders only needs to put down a fraction of the stock's value to get that exposure.

Last month, an army of retail investors went toe-to-toe with Wall Street professionals by buying into stocks that were heavily shorted by hedge funds. In the tussle, funds had to de-leverage some of their long positions to cover the losses on their bearish positions as GameStop surged over 2,500%.

But the trend was short-lived with those stocks pulling back sharply from highs, handing losses to late entrants.

JPMorgan said the cooling of the retail frenzy might be weakening one important support for stocks hovering near record-highs. But it does not expect it to lead to a major pullback.

(Reporting by Thyagaraju Adinarayan; Editing by Pravin Char)

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