Some Wall Street traders are betting on another massive rally at AMC Entertainment Holdings Inc. and other “meme” stocks this week through a type of options market bet that would limit their losses in the event that retail investors they are behind the previous period prove they are wrong.
Reuters analysis of options data and interviews with market participants, including a Wall Street banker and a $ 30 billion asset manager, show that some institutional investors have stepped up options trading. complexes that have allowed them to bet on the fall of stocks.
The so-called “bear put spread”, a common strategy of bearish options, also limits profits.
Its increased use now, which had not been previously reported, shows how Wall Street is looking for ways to take advantage of the unprecedented rise in retail trade while taking advantage of it after some high-profile funds have been seen affected earlier this year.
“It’s still dominated by these small retailers, but we’re seeing sporadic large institutions tempted only by prices,” said Henry Schwartz, head of product intelligence at Cboe Global Markets Inc., referring to options trading in AMC.
AMC has been at the center of a second wave of buying by retail investors who have been posting shares on forums such as RedSit’s WallStreetBets, giving new life to the “meme stock” phenomenon that increased the company’s 1,600 percent share. GameStop Corp video game retailer in January.
Shares of AMC rose just over 83% last week.
Shares have risen 2,160 percent this year, leaving traders with direct bets on nursing paper losses of about $ 4 billion, according to the latest available data from S3 Partners.
When stocks move just like AMC last week, sometimes more than double the price during a single trading session, the price of the options rises.
Normally, movements of this magnitude are not maintained for extended periods of time and some professional traders bet that this will be the case this time, i.e. the stock price will go down, according to market participants.
The problem is that they don’t know when this can happen and if they have the resources to stand firm in a broad confrontation with retailers, whose power lies in their numbers.
This is where a “put put” differential comes in. In the trading strategy, the investor buys a set of selling contracts, which gives them the right to sell the underlying shares at a certain “strike” price at a given time and sells another set at a set price. lower strike valid for the same period of time.
Selling the put options offsets most of the initial cost of buying the first set of contracts. If the shares do not fall or fall below expectations, the trader’s losses from the sale purchase will be largely covered by the proceeds from the sale.
The banker, a senior executive at a major Wall Street firm, said most of his institutional clients stayed away from meme stocks, but some had begun using bearish spreads to bet on them. The fund manager, which is headquartered in New York, said it used sell spreads to minimize risk and reduce costs while betting on AMC and other meme stocks.
Both asked for anonymity because they were not allowed to speak to the press.
Option trading data shows an increase in complex trades involving strategies such as sell spreads. These trades, typically favored by professional traders, accounted for 22% of AMC’s daily trades, on average, this week, up from 13% in May, according to options analytics firm Trade Alert.
According to the data, general stock trading continues to be overwhelmingly driven by retailers. This week, only between 10% and 15% of the total volume of daily AMC options was traded this week in blocks of more than 100 contracts, a size typically associated with professional players.
“It’s hard for institutions to stay away when volatility gets so high,” Schwartz of Cboe said. “They try to avoid it, but it does appeal to them.”