Apple Options Frenzy Shows Retail Loves a ‘Lottery Ticket’ Trade

(Bloomberg) -- Retail traders are reloading on bullish option bets after a brutal shakeout.

An Apple call with a $120 strike price expiring on Friday traded nearly 200,000 times on Thursday, making it the day’s most-active option, according to data compiled by Bloomberg. Trading surged even as the value of the contract plunged over 87% to close at $113.49 on Thursday -- well below the option’s strike. Despite the burst, the option’s open interest only increased by about 10,000 contracts, suggesting that the vast majority of the trading volume was positions opened and closed the same day.

To see such frenzied activity in what’s effectively a one-day option suggests that day traders are behind the flows, according to Charlie McElligott from Nomura Securities. Retail investors piling into megacap tech options are theorized to have fueled a bullish feedback loop in the stocks as dealers were forced to hedge their exposure by buying those same shares -- a dynamic that cracked last week, with tech stocks plunging. But demand for calls in Apple and other popular stocks may show that retail traders are unbowed even after this week’s 5% slide in the Nasdaq 100.

“The Robinhood set continues to play the ‘lottery tickets’ in options market,” said McElligott, a cross-asset strategist at Nomura. “Retail is still an issue, if that Apple type flow is indicative of anything.”

The flip side of the so-called short-gamma hedging that lifted stocks is what likely helped to exacerbate moves in the opposite direction. When shares fall, market makers are likely to undo hedges at an increasing speed, spurring more losses. Unwinding the build-up of bullish call options will be a “turbulent process,” according to UBS Group AG.

While punters in short-dated options were crushed in last week’s bruising finish, the losses here look less severe on a relative basis, said Chris Murphy, a derivatives strategist at Susquehanna.

“It doesn’t seem like that retail flow has been deterred,” Murphy noted. “It’s not a hugely risky option though, expiring in one day and only $0.11. The max loss to buyers is the price paid.”

©2020 Bloomberg L.P.