Options activity is continuing at a breakneck pace in January, building on 2020's record volumes. It is the latest sign of optimism cresting through markets as individual and institutional investors pick up bullish options to profit from stock gains and abandon bearish wagers.
More than half a trillion dollars worth of options on individual stocks traded on Jan. 8 alone, the highest single-day level on record, according to Goldman Sachs Group Inc. analysts in a Jan. 13 note.
Among the most popular bets were those tied to Tesla Inc., Amazon.com Inc., Apple Inc. and Nvidia Corp. And bullish call-options trading surged to a high on Jan. 14, with about 32 million contracts changing hands, according to data provider Trade Alert.
Options are contracts that give investors the right to buy (a call option) or sell (a put option) shares, at specific prices, later in time. They are typically used to bet on stocks' direction or hedge portfolios. Although they can be risky to trade for amateur investors, activity has exploded in recent months. The interest has stemmed in part from investors looking to magnify gains in the stock market, since options allow them to put down a relatively small sum for the chance at an outsize return.
Many of these investors have flocked to online brokerages that have made it easier than ever to trade. Smaller options trades of just one contract -- typically thought to stem from individual investors -- recently made up almost a tenth of activity, up from 2% three years ago, according to Trade Alert data.
The robust trading comes as U.S. stocks have jumped to fresh highs. Earnings results have poured in over the past week, with companies such as Netflix Inc. and Goldman Sachs posting strong results. In the coming week, traders will be monitoring a slate of releases from big tech companies, with Microsoft Corp., Apple, Facebook Inc. and Tesla on deck.
Investors have also looked ahead to the prospect of fresh stimulus that would help the struggling economic recovery. In January, stocks have built on their big, and perhaps unexpected, gains of 2020: The S&P 500 has gained 2.3%, setting four closing highs, after rallying 16% last year. The stock-market rally has also broadened, lifting laggard sectors like financials and energy.
Ben Austin, a 21-year-old student at Syracuse University, said he has increased his positions in stocks such as American Express Co. and Citigroup Inc., in part because of the chance for more fiscal stimulus, which he thinks could boost spending.
"For the next couple months, I'm still kind of bullish on the market," Mr. Austin said. "I think we're going to see another giant stimulus package."
He started trading options in November and primarily trades calls to position for big events that have the potential to lift stocks, shying away from put options. He acknowledges that options can be riskier than stocks but relishes trading.
"There's somewhat of a thrill to the more risk aspect of it," Mr. Austin said. "There's way more potential for higher gains in a shorter amount of time."
As stocks have continued their ascent and bullish positions have flourished, many have ditched bearish bets on the market.
Short interest in one of the biggest exchange-traded funds tied to the S&P 500 recently hit the lowest level since March 2020, according to data from IHS Markit. Investors that short shares typically borrow stocks and sell them, in the hopes of buying them back later at a lower price before returning them to the lender. These positions profit when stocks tumble. And bearish put options outstanding tied to the gauge recently fell to the lowest level in at least four years, Trade Alert data show.
"This is the most popular I've seen call buying in my career," said Jon Cherry, global head of options at Northern Trust Capital Markets, who has been in the industry for more than two decades. "Where I think that is really driving from is kind of the melt-up that we've seen in broader markets."
Mr. Cherry said he has noticed interest in bullish positions as well as a desire to sell bearish options to juice income. Investors don't want to miss out on any potential stock-market gains to come and want to stay in positions that will profit if stocks keep soaring, he said.
Hayden Cole, 22, a student at the College of the Canyons in California, waded into stocks and options after he lost his job during the coronavirus pandemic. He started chatting with his father about the stock market.
"He told me the stock market always recovers. It'll always go back up," Mr. Cole said.
He said he bought shares of fuel-cell company Plug Power Inc., an exchange-traded fund tied to the S&P 500 and the ARK Innovation Exchange-Traded Fund, which tracks shares of companies such as Tesla and Roku Inc., in May. Lately, he has placed bullish options trades on companies like Advanced Micro Devices Inc. and Apple.
The S&P 500 has soared 36% since May, while the ARK fund has jumped 179%.
To some, the current environment is reminiscent of August, when stocks such as Tesla and Apple soared after their stock splits and a seemingly insatiable enthusiasm for stocks and options swept through the market, helping drive stocks to highs. The summer euphoria was followed by a 7.2% drop in the Nasdaq Composite in September.
JPMorgan Chase & Co. analysts said in a Jan. 8 note that call-option buying was prominent among individual investors, based on an analysis of trading activity made up of fewer than 10 options contracts. This call buying could lead to a rise in volatility, driven by options hedging, they said.
And at times, overwhelming momentum in individual stocks such as GameStop Corp. has coincided with a surge in options activity. As the stock skyrocketed 51% on Friday, options activity tied to the company jumped to the highest level ever.
Options traders appear to be positioning for bigger gains for some of the sector's star performers ahead of their earnings reports this week. An options measure called skew, which measures the cost of bullish options relative to bearish ones, is near the lowest levels of the past year on stocks such as Apple, Advanced Micro Devices and Facebook, Trade Alert data show.
"People are always looking in the rearview mirror," said Joanne Hill, chief adviser for research at Cboe Vest, which oversees options-based strategies. "They're looking at the returns that had been achieved if they bought a call option on a stock six months ago.