Speculative Option Activity Is a Warning Sign for the Stock Market
The U.S. stock market is showing signs of topping out. Higher levels of volatility suggest a major downturn could be on the way. | Image: Johannes EISELE / AFP
- Speculative options bets on tech stocks have increased since the March bottom.
- The VIX remains elevated, suggesting higher volatility in the stock market.
- The tech bubble looks like it is about to pop.
Since the March bottom, options activity on Big Tech stocks and other names like Walmart has increased. The heavy options activity comes from individual investors and professionals. Speculative options bets could be a contrarian warning for the stock market.
Speculative Frenzy In Options Market Is Fueling a Bubble In Stocks
Analysts are watching above-normal activity, especially in call options. Investors buy calls when they expect stock prices to rise.
Peter Boockvar, chief investment strategist at Bleakley Advisory Group, said :
It’s just way to express a lot of speculation. If you’re going to speculate, what better way than in the options market.
Boockvar said the market rush feels like a sign of topping activity. Fundamentals don’t support the August rally in tech stocks. Although both benchmarks are at record highs, the Nasdaq 100 is up 37% this year versus 8% for the S&P 500.
The S&P 500 and the Nasdaq 100 share the same top five mega-caps–Apple, Amazon, Microsoft, Alphabet, and Facebook. The Nasdaq has greater exposure to the tech sector, which has brought the market back from its coronavirus rout in March. The Nasdaq 100 also includes Tesla, the California electric-car maker that has grown six-fold this year and hit a new high this week, making it the sixth-largest stock in the index.
When an investor buys a call option above the stock’s current price, he’s betting on a price increase. The call gives him the right to buy the stock at a fixed price in the future. The call option seller often covers this position by buying the underlying stock, putting upward pressure on the stock price.
According to Cboe , Apple, the most popular stock option, accounted for 4.7% of single-name option trades in August, 50% above average. Julian Emanuel, head of U.S. equity and derivatives strategy at BTIG , said investors are making much more big upside bets on more stocks than before the tech bubble sell-off in 2000.
Expect More Volatility In the Stock Market
The Nasdaq 100 Volatility Index (VXN) has been rising in recent days, suggesting the market is wary of the sharp rise in tech stocks. The Volatility Index (VIX), based on activity in S&P 500 calls and puts trading on the Cboe, remains elevated as stocks hit new highs. A higher VIX means more volatility in the stock market.
The U.S. stock market fell on Thursday as investors sold surging tech stocks to go into less-concentrated sectors. Apple stock fell by more than 5%.
The tech bubble might be finally starting to pop. This will bring down the whole stock market.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The writer owns shares of Microsoft and Walmart.
