Meme Mania Rekindles Small-Trader Love Affair With Options

Retail traders are storming back into the options market as meme stocks soar.

Trades involving 10 contracts or fewer are rising as a percentage of overall equity-call volume, according to data from the Options Clearing Corp. Such small lots suggest that individual traders are behind the buying, according to Susquehanna International Group.

The reemergence of retail in the options market can fuel a “self-fulfilling prophecy” in the stocks they’re targeting, according to Gene Goldman, chief investment officer at Cetera Financial Group. When dealers sell calls, they concurrently purchase some of the underlying shares to hedge their positions back to neutral. Then, they continue buying as the strike price gets closer to the level where the shares are trading. That so-called gamma hedging effect can add fuel to rallies already in motion.

“It’s a bit dangerous and can exaggerate market moves up or down,” Goldman said. “When they’re buying those shares, theoretically they are selling other shares, and that could undermine the market down the road, because a lot of time they will sell their most-liquid names.”

Meme Mania Rekindles Small-Trader Love Affair With Options

Such a feedback loop may already be at work in AMC Entertainment Holdings Inc., which has soared more than 2,000% this year. A record 2.4 million calls were purchased on Friday, beating the previous day’s all-time high. An additional 1.2 million bullish contracts were bought on Tuesday.

AMC is the biggest gainer in what’s been an all-encompassing meme rally. A basket of stocks caught up in January’s Reddit-fueled stock frenzy has climbed to its highest level since March. Short-sellers, still smarting from January’s burn, have been scorched by the surge.

To Vanda Research, the resurgence in call volume speaks to a generational divide. Older investors have tended to buy shares outright, while younger thrill-seekers have returned to the options market after a foray into cryptocurrencies.

“The premium spent in small-sized call option trades has been picking up, a sign that risk-seeking retail investors are making a comeback,” strategists Ben Onatibia and Giacomo Pierantoni wrote in a note Wednesday. “In February and March, we saw the exact opposite. Cash purchases remained strong as baby boomers joined the equity market, but option volumes tanked as millennials rotated into crypto.”

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