“What we have seen is a focus on short-term, out-of-the-money call options because they have these lottery-like payoffs,” said Garrett DeSimone, head of quantitative research at OptionMetrics, an options database and analytics provider for institutional investors and academic researchers.
That activity has been amplified, in some cases, as options investors gather on Reddit’s Wall Street Bets forum and elsewhere to brag about wins, commiserate about losses and, in particular, urge each other to pile into a particular stock and to hold the fort when suffering setbacks. The ability of individual investors to muscle heavily shorted shares represents “a new facet of the market that didn’t exist five years ago and needs to be respected,” Mike Zigmont, head of trading and research at Harvest Volatility Management, in an interview.
An overall surge in online trading has been attributed to a number of factors, including cooped-up investors looking for ways to spend their stimulus checks last spring.“What is often lost in the narrative is that retail investors have to manage capital really well,” said J.J. Kinahan, chief market strategist at brokerageTD Ameritrade.
Fundamental disconnect While the Reddit phenomenon has raised legal questions around coordinated activity, the bigger concern among some market veterans is the disconnect between price action and market fundamentals. Indeed, while the ability of individual investors to effectively “hunt” short sellers is a wrinkle that wasn’t enjoyed by dot-com-era day traders, it’s another reason for investors to worry that the broad equity-market rally is entering a dangerous phase, Zigmont said.
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