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Head of Equity Strategy 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.
Tesla is down 6. 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. 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.
Why is this important?
Source: Bloomberg Since late last year US equity options trading has been commission free driven by Robinhood. 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. What likely happened yesterday was that Tesla shares fell just enough day trade robinhood crypto 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. 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. Source: Bloomberg The chart day trade robinhood crypto is a 5-year chart on the stocks mentioned in the research note.
This is for regulatory purposes. Source: Bloomberg.