Some Wall Street traders are betting that AMC Entertainment Holdings and other “memetic” stocks will rise sharply again this week. Through a bet on the options market, if retail investors prove they are wrong, this will limit their loss.
Reuters’ analysis of option data and interviews with market participants (including a Wall Street banker and a fund manager with $30 billion in assets) revealed that some institutional investors have increased complex options trading, allowing them to bet Note that the stock price will fall.
The so-called “bear market put spread”, a common put option strategy, also limits profits.
Its increased usage now (not previously reported) suggests that Wall Street is looking for ways to profit from unprecedented growth in retail transactions after some well-known funds were hit earlier this year, while proceeding with caution.
Henry Schwartz, head of product intelligence at Cboe Global Markets Inc, said of AMC’s options trading: “Of course, it’s still dominated by these small retail transactions, but we see that sporadic large institutions are only dictated by pricing. attract.”
AMC has been at the center of the second wave of retail investors buying. Retail investors have been hyping the stock on Reddit’s WallStreetBets and other forums, injecting new vitality into the “memetic stock” phenomenon, leading to video game retailer GameStop Corp The stock price rose by 1,600% in January.
In the past week, AMC’s stock price has risen by more than 83%.
According to the latest data provided by S3 Partners, the stock has soared by 2,160% this year, and traders directly bet on its book loss of nearly US$4 billion.
When a stock fluctuates like AMC did last week—sometimes the price more than doubles in a single trading session—it pushes up the price of options.
Market participants said that volatility of this magnitude usually does not last long, and some professional traders bet that this will be the case this time, which means that stock prices will fall.
The problem is that they don’t know when this will happen, or if they have the resources to gain a foothold in the long-term confrontation with retail investors. The strength of retail investors lies in their number.
This is where the bearish spread comes from. In a trading strategy, investors buy a group of put contracts, which gives them the right to sell the underlying stock at a specific “execution” price at a specific time, and at a lower execution price that is effective within the same time frame.
Selling put options offset most of the upfront cost of buying the first set of contracts. If the stock does not fall or the decline is lower than expected, the loss suffered by traders from buying put options will be largely compensated by the gains from selling put options.
The banker is a senior executive of a large Wall Street company. He said that most of his institutional clients are far away from meme stocks, but some people have begun to use bearish spreads to short them. The New York-based fund manager said that when betting on AMC and other meme stocks, he is using put option spreads to minimize risk and reduce costs.
Both requested anonymity because they did not have the right to speak to the media.
Option trading data shows that complex trading involving strategies such as put spreads has increased. According to data from the option analysis company Trade Alert, such transactions are generally favored by professional traders, accounting for an average of 22% of AMC’s daily transactions this week, up from 13% in May.
Data shows that overall stock options trading is still mainly driven by retail traders. Only 10% to 15% of the total trading volume of AMC options this week was traded in the form of more than 100 contracts. This scale is usually related to professional players.
“When volatility is so high, it’s hard for institutions to stay out of the way,” said Schwartz of the Chicago Board Options Exchange. “They tried to avoid it, but it really attracted them.”