The Jackpot Bells keep ringing

Photographer: Kiyoshi Ota / Bloomberg

Like a slot machine that pays on every draw, the most reliable bets on the stock market lately have often been the riskiest.

It takes a long time for a company that seems to be something that Elon Musk mentioned a tweet (but it wasn’t)? Signal Advance Inc. just increased 12 times. Borrow money from a software manufacturer to buy Bitcoin? A Microstrategy Inc. the convertible bond increases by 50% in four weeks (its option is in cash). Do you back up your truck with bullish options after the Nasdaq 100 has doubled in 24 months? Wednesday was the fourth busiest call trading day in the US (the other three were last year).

Throw an arrow, hit a winner, it seemed like that lately. In love with the stimulus of the Federal Reserve, vaccines and the psychological conditioning that occurs when no bad patch lasts, everyone, from beginners to retailers to institutional managers, rushes to collect the 10-month melt. Of course, it is possible that all this could continue for weeks, if not months, without so little reversal. Predicting exactly when such a fever will break out is an almost impossible task. But bubble warnings begin to be heard from every corner.

“It’s a complete mania, and the young bull’s close friends don’t make it safer to get on board,” wrote Doug Ramsey, Leuthold Group’s chief investment officer, in a Jan. 8 report to clients. its was also among the buyers. “We are as guilty as the others in pursuing this impulse”

His tracking works. Four days after the end of the year with almost 40 times gains, the Nasdaq 100 index recorded the largest rally in the last two months. On the other hand, hedging against stocks was expensive. A basket of short positions of favorite manager resisted by 10% last week, gathering the most in seven months. Hoping the mania goes away, it also turns out to be useless. The frenzy over special-purpose procurement companies continued, with a dozen making IPO deposits on Friday, including one with a check mark.LMAO. “

“Too much foam, too much satisfaction,” said Matt Maley, chief market strategist at Miller Tabak + Co., who thought last week’s show in Washington would at least slow the frenzy. “After a 16% rally in just two months and a 70% rally in March, that news should have shattered the market. A 10% -15% correction would be normal and healthy. “

Capacity of Tesla Inc. to add 25% to a market value of nearly $ 700 billion over five days made headlines last week, but for a real foam, the options market was the right place. The calls expire on January 15 with a weight price of $ 1,000, the most traded Tesla option on Friday, fivefold on Friday, ending the week at $ 9.15 after starting at 53 cents each.

People appear to be leading the action, according to JPMorgan Chase & Co., which cited a proxy for data from the NYSE margin account that indicates a potentially strong rise in December compared to previous months. Buying options to buy small traders returned violently after a seasonal decline in the last week of December, as did retail-oriented off-exchange trading, the bank says.

“The liquidity force seems to be reverberating again in an intense way through retail investors, in a repeat of the second quarter of last year,” strategists led by Nikolaos Panigirtzoglou wrote on Friday. “Given the anticipation of additional fiscal support, this force is likely to be sustained in the coming weeks.”

The industry has taken note. Cboe Global Markets Inc. adapted the products for smaller investors. Updated the S&P Index mini options to increase liquidity and provide better execution to retail customers, after saying in June that it will revive a mini-VIX product intended at least in part for smaller traders.

The company has tried to “produce some products that take into account these changes in investor demand, which we believe is here to stay,” said in a November interview Arianne Criqui, head of financial derivatives and global services for Cboe customers. she noted that Robinhood Markets Inc. says only about a fifth of its customers’ trading options. “We see great success” for more people to get started, she said.

Jason Goepfert of Sundial Capital Research raises flags in late December about how much force retailers exert on the options market. He cited data on the number of call purchases and the money spent on them – where the smallest participants had a share of 54% compared to 28% for the largest.

“From the look of things, it has gotten even worse,” Goepfert wrote in a note Tuesday. “The most reliable sentiment measures tend to be those that focus on real money and leveraged instruments. Then the emotion has the biggest impact. When we look at some of the most leveraged vehicles available to investors, there is widespread evidence of extreme speculation. “