Powell’s speech triggered record options bets, topping even the meme stock frenzy

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The speculative frenzy following Fed Chairman Jerome Powell’s speech last week fueled record call-option trading on Thursday, and there could be more Powell-related options on Tuesday, when investors wait for his speech at noon.

But last week’s record stock call volume could also be a sign of a mid-term peak in speculative behavior, said Julian Emanuel, head of equities, derivatives and quantitative research at Evercore ISI.

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“Reverse indicator?” he asked in the note, adding that the previous record call-buying activity was in January 2021, just when the meme stock frenzy was at its peak.

Susquehanna said 40 million calls were traded last Thursday. Stocks continued their two-day gains that day on Powell’s dovish comments during his press briefing on Wednesday afternoon.

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These options were large market rates, as in SPDR S&P 500 ETF And Investo QQQ Trust, which represents Nasdaq 100. But they also focused on three big tech stocks that reported earnings after Thursday’s bell. Apple, Alphabet And Amazonaccording to Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.

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Most of the volume came from pre-expiration zero-day options that expire on the same day. An investor buying a call option is betting that the stock or ETF covered by the option will rise, so overnight option investors were expecting an intraday jump.

“There was a ton of short-term call volume when the market had all this positive momentum, before the NFP. [jobs report] pouring cold water over it,” Murphy said. “It was a bit of a perfect storm with a couple of these different factors. When upward momentum accelerates, it is simply a new phenomenon. We’ve seen a ton of this in 2021. Not so much last year. And now we see him coming back.”

Murphy said the stock was muted Monday, but he said investors are now focused on Powell’s 12:40 pm ET Tuesday speech at the Economics Club of Washington, DC.

Investors are wondering if Powell will reverse any comments he made on Wednesday when he said he was pleased with the disinflationary trend. He mentioned “disinflation” many times, and strategists said it led investors to believe that the Fed was winning the war on inflation and could soon put its rate hike on hold.

But Friday’s employment report changed things somewhat, as investors feared the labor market could be too hot and fuel inflation. In January, 517,000 jobs were added, nearly three times what was expected.

“It’s been a quieter day today because we have Powell tomorrow,” Murphy said. He said that the SPDR S&P 500 ETF and Tesla were the most active options. He added that on any given day, the S&P 500 ETF, QQQ, Tesla and Apple could be in the top five.

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Murphy said Thursday’s call volume topped 38 million on January 27, 2021.

Of the 40 million calls traded last Thursday, relatively few became long positions. Open interest, or the number of options outstanding on exchanges, rose by just 6.3 million, Murphy said. That day, 28 million puts were also traded, and open interest increased by 7 million puts. A put is a bet that a stock or ETF will fall in value.

“It’s more like intraday trading,” Murphy said of overnight options. “There’s so much liquidity in options that you really don’t need to trade stocks during the day.”

Murphy said he expects to see SPY, the S&P 500 ETF, trade in connection with Powell’s speech. He said that if an option investor in overnight options bets on Powell, he will say something that will cause a negative reaction, they can buy a put option on the ETF.

He said, for example, that the ETF was last at $400 early last week, and if an investor wants to bet that the SPY ETF will drop to that level after Powell, investors can buy the option for 10 cents on Monday afternoon. SPY closed at $409.83 on Monday.

If the market started to fall, as Powell said, and the option became more valuable, investors could sell the option at a higher price.

Murphy said last week’s surge in volume seemed to indicate a short-term top of some speculative activity.

“It didn’t happen enough times to have a real track record,” he said. “The reality is that if you bought the stock market in January 2021 and held it for any length of time, you would be happy.”

Credit: www.cnbc.com /

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