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Wild ride. Friday offered up a wild day of trade for stocks and bonds leaving many investors scratching their heads. Better than expected employment data gave an early boost to stocks which then proceeded to sell off… only to stage a late-session rise.
N O T E W O R T H Y
The best option. Overhead by yours truly this past Sunday as I sat with my family on the banks of the Hudson River admiring the beautiful NYC skyline: “Bro, I have been playing options. I studied them for a month and figured out how to bet on stocks going up.” Uttering those very words was a twenty-something shouting into his cellphone. Never mind the “stocks going up” or the fact that he was mask-less, what got me were two words: playing and bet. I have written a word or two about the “merry men” and "the trader bros” who have taken to the no-frills, online brokers to speculate on all sorts of companies. This is the same group that drove share prices up on bankrupted companies, misspelled ticker symbols, and high flying tech stocks. It is no secret that a new generation of trader has entered the fray and there is lots of tangible and anecdotal data to support it. That said, I am not questioning the investment decisions of the group, but rather acknowledging the fact that they exist and that their presence can have a material effect on market behavior. Take for example Tesla. Everyone loves to talk about Tesla these days, and for good reason. We cannot deny that CEO Elon Musk has done wonders with company. The company single-handedly ushered in the era of Electronic Vehicles (EV), paving that path for not only a whole new group of manufacturers, but the traditional automakers as well. The company has become profitable and has demonstrated amazing earnings growth potential. That said, one would expect the stock to be hot, and it has not disappointed. The stock was up by +495% for the year as it hit its height by the end of August! A big part of the stock’s growth came from retail traders jumping in to get a quick profit. Most institutions and professional money managers have stayed away from the stock because of its high price, but that has not stopped the speculators. Tesla is not alone in its meteoric rise. There has been a noticeable melt-up in tech growth stocks recently, which was punctuated by an eye-opening selloff last week. The interest in the stocks makes sense, but the pace of buying… and selling has left many seeking answers. Getting back to my weekend encounter, I wasn’t necessarily surprised to hear the stock-trading neophyte’s admission. Data has suggested a recent surge in call option open interest in high flying tech stocks. Remember that call options give the holder the right to buy a stock at given price at a given time. More specifically, 1 call option allows the holder to purchase 100 shares of the underlying stock. If the underlying stock goes up, so does the price of the call option, and vice versa. The loss potential of a long call option is limited to the premium paid plus any commissions. You could see why an option would be interesting for a highly speculative trader who is interested in “betting” that a stock will rise. There are two things worth noting here. First and foremost, options trading is highly speculative and is not appropriate for most investors. If the stocks underlying the options go up, the dealers which sold (or wrote) the options tend to purchase the stocks to meet the obligation. The increased buying only adds fuel to an already existing rally. Guess what happens if the stock trades down? Well, you know… the exact opposite: accentuated selling. So in the case of some these recent high-flying tech stocks, the extreme ups and downs have only been made more extreme as speculators turn to the options markets. By the way, it’s not just “Davey Day Trader” chasing stocks up and down. Last week, it was reported that SoftBank had accumulated a significant amount of bullish option positions in recently rocketing tech shares. In this case, the Wall Street Journal was referring to $4 billion worth of recently purchased bullish options trades. Significant indeed. That can certainly explain some of the tech-heavy Nasdaq’s recent gains… and falls.
THE MARKETS
Stocks had a wild session on Friday, rising in response to good jobs data then selling off. A late session comeback brought stocks almost back to break-even before sliding, once again, into the close. The S&P500 slipped by -0.81%, the Dow Jones Industrial Average traded down by -0.56%, the Russell 2000 dropped by -0.61%, and the Nasdaq Composite Index gave up -1.27%. Bonds sold off in response to the strong economic data and 10-year treasury yields climbed by +8 basis points to 0.71%.
NXT UP
- This morning, NFIB Small Business Optimism (Aug) rose to 100.2 from last month’s 98.8 level.
- Slack and Coupa Software will announce after the close today.
- The week ahead will feature a number of stay-at-home stock earnings along with JOLTS Job Openings, CPI, and PPI. Please refer to the attached earnings and economic calendars for details.
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