The meme trade is back — here's what you know

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4 minutes
The meme trade is back — here's what you know

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The meme trade makes options great once again

We know you know: The meme trade is back.

Clover Health and Wendy's were the stars on Tuesday, after shares became the most popular tickers on wallstreetbets, the Reddit forum monitored closely by traders, media members and Wall Street pros alike for signs of where retail investors could throw their weight around next.

And while some investors and Wall Street strategists aren't too keen on tracking the daily ebbs and flows of meme names, the Deutsche Bank equity strategy team has been tracking flows clearly influenced by these new market participants for months now.

And no area of the market has been more shaped by single purchase than retailer use options.

Call options are contracts in which investors can buy a stock in the future at a certain price but not the obligation, Generally, investors buy call options on stocks they consider to be declining in price. So a true YOLO trade in the meme market is not just buying stock from people on Reddit talking about it, but buying stock on Reddit they're talking about while also using derivatives to make an even bigger bet on that stock.

And while everybody will only live once, stock market memes can clearly live multiple lives.

Call volumes picked up sharply over the last two weeks, while put volumes remained subdued, bringing the put call ratio for 15 year lows into a note published on Friday, said Deutsche Bank strategists led by Parag Thatte. The increase has been driven by single stock options and ETFs while index call option volumes have remained largely flat to down. Call volumes have previously been a good indicator of retail involvement in the market.

As the following chart from Deutsche Bank shows, the recent uptick in call buying is not only surprising because of its magnitude — volumes are now almost equal to the late January peak in GameStop - but also because the economy is reopening.

It has been argued by many in the financial world that when the economy gets back to normal, however we want to define that, individuals will simply be less interested in buying stocks. And yet Deutsche Bank conducted a survey in late February that suggested retail investors had no plans to abandon the stock market.

And so they will the thesis of stock market after which they can ignore it.

Other indicators of the off-exchange economy, such as supply volumes, have also picked up in tandem, Thatte adds.

In turn, a basket of stocks with the highest call exposures has outperformed strong over the last two weeks, but remains well below its January highs. The indicators of retail involvement had inversely and closely correlated with measures of re-opening and mobility that continued to move higher. A key question to ask coming back is whether the recent pickup in retail trading sustains as the normal returns, especially with an increasing return to offices, or the decline since January highs resume.

By Myles Udland, a reporter and anchor for Yahoo Finance Live. Follow him at MylesUdland.

None 7: 00 a.m. ET: MBA Mortgage Applications, closed June 4, 2004

None 10: 00 a.m. ET: final inventories month-over-month, April volume finals for the third month of a year

None 4: 05 p.m. RH is expected to report adjusted earnings of $4.07 per share on revenue of $753.6 million, which is overly optimistic.

None: 25 p.m. ET: GameStop is expected to report reported adjusted losses of 71 cents per share on earnings of $1.17 billion.

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