Speculative Robinhood Traders Are Buying Call Options At 2000 Crash-Record Levels, Pushing Stocks Up

Written by Dana Sanchez
Speculative Robinhood traders are buying call options at 2000 crash record levels, pushing stocks up. Small investors made up 50 percent of total volume last week. Trader Gregory Rowe works on the floor of the New York Stock Exchange, Jan. 6, 2016. (Richard Drew / AP)

Robinhood traders are among a new group of homebound investors who are betting against veteran billionaire investors and winning as part of a surge in retail trading activity driven by the coronavirus, Markets Insider reported.

Robinhood is a mobile app based in Silicon Valley that lets people invest in stocks, ETFs, and options with no commission fees.

Speculative enthusiasm in U.S. stocks has reached levels not seen in at least 20 years among U.S. options traders, according to Bloomberg.

A rally in U.S. stocks on Monday pushed the S&P 500 back into green territory for the year, bolstered by optimism for an economic rebound. After its low in March, the benchmark closed at a 15-week high and the Nasdaq 100 rose to a record.

Increased trading by retail investors is credited in part to sports bettors speculating on stocks as pro-sports leagues shut down temporarily during the pandemic.

Dayanis Valdivieso, 22, used part of her stimulus check to make her first-ever stock trade using a Robinhood account.

“It was basically free money, so, you know, I decided to play around with it,” she told the Wall Street Journal. “You might lose some, you might win some. It’s like a gambling game.”

Other traders reached out on Twitter to share their Robinhood experiences.

“I got my little sister Robinhood account looking Good. Flipped her Stimulus money lol,” blue @CountOnRodney tweeted.

David Portnoy, aka Davey Day Trader of Barstool Sports, is credited with introducing a whole new audience to stocks, Markets Insider reported. Portnoy’s trading videos get up to 1 million views on Twitter.

“Stocks only go up, this is the easiest game I’ve been part of!” Portnoy said in a video on June 4.

Small investors’ call-option buying made up more than 50 percent of total volume last week, the highest since 2000, according to Sundial Capital Research Inc.

That kind of enthusiasm worries some market observers, WSJ reported. In the late 1990s, small investors bought into unproved .com companies after the Fed slashed interest rates in 1998 during a financial crisis. The Nasdaq market collapsed in 2000.

“Options traders make stunning bets on rising prices,” Sundial founder Jason Goepfert wrote in a note Monday. “This kind of activity has a strong tendency to lead to negative returns in the S&P 500 and other indexes over a multi-week to multi-month time frame.”

Recently, this new group of traders has been betting against veteran billionaire investors including Warren Buffett and Carl Icahn, and they’re starting to win, Matthew Fox wrote for Business Insider.

Buffett said in early May that Berkshire Hathaway had liquidated its stake in the big four airlines. Almost simultaneously, Robinhood investors and Portnoy started piling into airline stocks, resulting in a 55-percent surge in U.S. Global JETS ETF assets.

“Robinhood should open their own casino for millennials,” Ben Carlson
tweeted. “You could play Blackjack and buy airline stocks in-between hands”.

In late May, Icahn liquidated his shares of Hertz after it filed for bankruptcy. His loss represented more than $1.8 billion. Retail traders, undeterred by the bankruptcy, piled into the stock. Robinhood accounts that own Hertz have almost doubled to 73,000 as of Friday since Hertz’s bankruptcy proceedings started.

In the past, when bullish small-trader positions made up 45 percent or more of volume, it preceded a median loss for U.S. stocks of about 3 percent within two months and 15 percent within a year, according to Portnoy’s note, Markets Insider reported.

Since mid-May, more than 12,000 Robinhood accounts bought the S&P 500 ETF SPY for a total of almost 100,000, according to data from Robintrack

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“The key parallel between 2000 and today is that retail investors are seeing the stock market as a can’t-miss opportunity,” Michael O’Rourke, chief market strategist at JonesTrading, told WSJ.

There are signs the stock rally is doomed to end after its $21 trillion rebound, Bloomberg reported.

“This rally is a function of government support being thrown behind the economy,” said Paul Sandhu, head of multi-asset quant solutions and client advisory for Asia Pacific at BNP Paribas Asset Management. “There are key risks that could lead to more volatility ahead over the short term.”

Social media users appeared to be grounded in reality despite the euphoria.

As Layne tweeted @Mystifiii, “this robinhood shit easy (stay tuned for my follow up post in 24 hours where i lose it all)”.