Heightened activity in options on Big Tech stocks and other names, like Walmart, shows a highly speculative appetite among investors that could be a contrarian warning about the stock market. Analysts have been monitoring the higher-than-normal activity, particularly in call options — those that investors buy when they expect a stock price to rise. "It's just way to express a lot of speculation," said Peter Boockvar, chief investment strategist at Bleakley Advisory Group. "If you're going to speculate, what better way than in the options market."' Boockvar said the rush by investor has the feel of topping activity. Julian Emanuel, head of U.S. equity and derivatives strategy at BTIG, said he's been paying attention to an unusual type of activity, which became very apparent during the month of August in individual stock options and is continuing. He said there's been an inverted skew in three-month options on a number of individual company's stocks. He said that means the 10% out-of-the-money calls, or big bets on a move higher, had a much higher volatility price than the out-of-the-money puts, which would pay off if a stock declined. That occurred on two dozen stocks Wednesday, he said. "It's limited risk and the purest expression of the momentum trade that you can imagine," Emanuel said. Options can be a cheap way to capture a stock's upward move without having to purchase an equity. Some of the stocks where that happened were Apple, Tesla, Zoom and Nvidia . It also had even happened in Delta Air Lines and Newmont Mining recently. Emanuel said that in February, before the market's big sell-off, just one stock, Tesla, had similar activity. "It certainly was one of the things that got us cautious in February, the inverted skew," he said. Analysts say the heavy options activity is coming from the retail market and professionals. Individual investors appear to be active in weekly options, while institutions are making longer term bets. Emanuel said that ahead of the tech bubble sell-off in 2000, there were nowhere near this many stocks where investors were making such big upside bets. "All this weekly options activity has made the extraordinary become the commonplace in the last several weeks," Emanuel said But Dan Deming, managing director at KKM Financial, said it appears some of the longer-term action is the result of institutions doing stock replacement trades, or selling out of stocks and replacing their holdings with call options. "It still allows them to have the notional value, or the leverage to the upside, but if the market does have a 20% correction, their downside is the cost of those options," he said. "This would be a great time to do that when you are realizing substantial gains in some of these names." Deming said this active trading in individual options comes against the backdrop of heavy trading in VIX futures, used by many investors to hedge around the election. The VIX is the Volatility Index, based on activity in S & P 500 calls and puts trading on the Cboe. "Just the sheer open interest and demand for VIX options is astounding right now. You've got some pretty wide dispersion on what market participants feel is going to happen to the market," he said. Deming said October futures on the VIX are over $35, while the cash VIX closed at $26.57 on Wednesday. November VIX futures were at $33.55. A higher VIX means higher market volatility. "The smart money is getting ahead of what they see as a very volatile period," Deming said. "That's why this kind of melt up we saw today [in stocks] is exactly what causes anxiety for a lot of market participants. You had the VIX future up across the board and the market was up more than 1%. Some market participants are saying this thing is stretched like a rubber band. it's going too far outside normal bounds. Something is going to happen. What it is, I don't think anybody knows."
