Skewed options market causes huge moves in US tech stocks

Equities 6 minutes to read
Picture of Peter Garnry
Peter Garnry

Chief Investment Strategist

Summary:  In the last week we have observed how the VIX Index has increased despite new record highs which is an unusual behaviour. Part of this move is heavy volume in call options in several US technology stocks such as Apple and Tesla forcing market makers to aggressively buying the underlying stocks to hedge their short call option positions. In this research note we discuss the dynamics and how it can cause significant volatility in technology stocks over the coming week.


Several US technology stocks are down in US pre-market pushing Nasdaq 100 futures down 1.2% for the day while European equities are firmly in positive territory and S&P 500 is holding the line. Tesla is down 6.5%, Apple is down 2.5%, Zoom is down 4% and DocuSign is down 6% just to name a few of the technology stocks hit in pre-market. In this research note we lay out that volatility could rise dramatically under the right circumstances and that it is the US equity options market dynamics that are driving the behaviour this morning.

As we mentioned in our Quick Take this morning and on our morning Saxo Market Call podcast, there was evidence in yesterday’s session of fragility beyond what could be explained from news. Tesla shares were down as much as 15% intraday and Apple was at one point down 5% which is unusual for such large cap stocks on no important news or overall market decline. The US and global equity market were on a firm footing yesterday, so any statistical analysis would obviously point to something odd going on. What happened was a sharp reversal in call options to put options volume on US equities indicating significantly shift in options volume. We still do not have the numbers on outstanding options from Cboe from yesterday’s close, but our guess is that the number of outstanding call options to put options were dramatically reduced yesterday. Why is this important?

3_PG_1
Source: Bloomberg

Since late last year US equity options trading has been commission free driven by Robinhood. Combined with the COVID-19 restrictions millions of new investors have opened accounts with online brokers in the US. Many of these are trading in equity options because it gives more upside through the implied leverage. What we have observed over the past couple of months is that retail investors are aggressively buying call options which means that market makers are short all these call options. To neutralize their exposure and get a loss if the underlying stock price soars they buy the underlying. If the outstanding notional of call options become big relative to the normal trading flow in the underlying the market makers’ delta hedging causes the underlying stock price to become more volatile.

What likely happened yesterday was that Tesla shares fell just enough to push the delta low enough on a lot of the outstanding call options so that market makers began unwinding a lot of Tesla shares. This caused a sharp sell-off in Tesla shares. The subsequent rebound could have happened because a lot of retail investors bought large quantities of call options forcing market makers to buy the underlying to hedge their options book. These options dynamics are causing massive intraday volatility in certain stocks, so we recommend traders and investors to prepare for large sudden intraday moves.

Tesla Sep 18 call options with strike at $450 (just above yesterday’s close) are trading at implied volatility of 120% indicating the huge uncertainty in Tesla’s share price. This means that investors buying call options really need big moves to the upside to get the calls in the money. At some point many investors buying these calls will learn it the hard way that these implied volatility levels are extremely elevated and expensive. Please also note on the chart below that the open interest in this particular option actually rose yesterday, indicating that retail investors aggressively added call options despite the sharp 15% intraday sell-off.

3_PG_2
Source: Bloomberg

The chart below is a 5-year chart on the stocks mentioned in the research note. This is for regulatory purposes.

3_PG_3
Source: Bloomberg

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.