Traders Set Record Bets on Amazon, Chinese Stocks Jumping Higher

(Bloomberg) -- Beneath the surface of the highest-flying stock markets in the world, animal spirits keep rampaging like rarely seen before.

Even as tech investors pause for breath after powering U.S. benchmarks from Covid lows, Amazon.com Inc. is still seeing historic demand for call contracts so bullish they only have an estimated one-in-ten chance of paying off.

With the company’s shares up 66% this year, traders are bidding up the price of options that have it jumping another 50% in the next three months. Contracts betting on the online retailer to reach $4,600 by October were among the most-traded calls for that expiry month on Monday.

The speculative frenzy is a similar story for Twitter Inc. and Tesla Inc. -- all signs that options traders see value in wagering that the biggest stock winners will keep winning.

Fresh risk appetite is on display in another momentum-driven market eliciting cheers and fears on Wall Street. Demand for bullish contracts on a $3.5 billion China exchange-traded fund has jumped by the most ever in the wake of that country’s euphoric stock rally, according to Credit Suisse Group AG.

With potential losses capped at the amount paid for call options, many investors see little risk in shelling out for bets on more windfall gains.

“It’s all FOMO related,” Susquehanna’s derivatives strategist Chris Murphy wrote in an email. “Skeptical about buying after a rally but don’t want to miss out on further upside.”

In Amazon stock trading, the implied volatility of way out-of-the-money calls has surged to a record relative to at-the-money contracts -- a sign of outsize bullish demand in a key corner of the derivatives market.

Traders are also chasing fresh upside in Chinese equities after the country’s influential state media stoked bullish enthusiasm. Call skew, a measure of the implied volatility of calls versus puts, has jumped by a record for BlackRock Inc.’s iShares China Large-Cap ETF, or FXI, according to Credit Suisse.

“The last time we saw such a dramatic bid for upside calls was in April 2015, after FXI surged 24% in a month, leading to an euphoric chase in the options market,” Mandy Xu, equity derivatives strategist, wrote in a note. “Unfortunately, the rally proved to be short-lived, with FXI falling 3% in the month after and over 20% in the following three months.”

With Monday’s reversal in the mega caps and technical momentum measures stretched, there are good reasons for caution. One measure of implied volatility for the Nasdaq 100 index, derived from call and put contracts, has climbed by 8 points in the past week even as the benchmark has advanced.

Still, with the put-call ratio for the tech gauge on Friday slumping to the lowest since March, speculative mania seems to be overshadowing hedging activity.

“This appears to be true upside panic/FOMO ahead of earnings this month,” Murphy wrote in a note.

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