(Bloomberg) — As the debate rages as to who has had the most impact on option markets — retail traders or institutions — what’s becoming clear is the sheer size of the wagers of the professionals.
RBC Capital Markets strategist Amy Wu Silverman noted bullish bets in a handful of technology companies in August as having all the hallmarks of a big institutional trade — with “a staggering $1 billion-plus in premium spent.” Henry Schwartz at Trade Alert LLC cited trades with about $1.4 billion in premiums spent last month.
The options data show that institutions jumped into derivatives trading to ride the powerful tech stock rally that started with day traders at home. Now with the Nasdaq 100 poised for another day of losses, the bigger question is how any pullback hit investors big and small.
The most likely institutional trades were placed on Aug. 5 in options on stocks like Microsoft Corp., Facebook Inc., Adobe Inc., Salesforce.com Inc. and Alphabet Inc., according to recent notes by RBC and Trade Alert. They involved call spreads — strategies designed to profit from a modest increase in stock prices.
One example is a call spread in November Microsoft options. The bet is designed to pay out if the stock — which closed around $214 on Friday — rises to between $220 and $240 at expiry. That was priced at $6.75 a contract and its value is now somewhere near $7, according to Schwartz.
A second trade, which the investor has already closed out, was a similar strategy betting on modest gains in Facebook shares. That was bought for $10.50 a contract and sold for $15.60 with the proceeds put into a call spread with higher strike prices, he said.
Huge swings in stocks experiencing heavy options volume have consumed investor attention recently as U.S. benchmarks surged to multiple records. On Monday, SoftBank Group Corp. shares tumbled in Tokyo after reports that the Japanese conglomerate made substantial bets on equity derivatives amid the surge in technology stocks.
SoftBank previously said it invested in Adobe, Microsoft, Alphabet in a filing dated June 30, and founder Masayoshi Son mentioned Facebook during a recent post-earnings conference call.
SoftBank’s Big Options Bet Tests Investor Faith in Masayoshi Son
Despite the stock market selloff late last week, whoever was behind the early August trades is still doing well, according to Silverman.
“While Thursday and Friday’s move certainly hurt, it is important to note that all the option positions initiated on August 5th are still marking up,” she said. The investor has reached the strike price in bets on Facebook, Adobe and Salesforce.com, though is still out of the money on wagers on Microsoft and Alphabet, she noted.
Given the frenzy surrounding the options bets, traders will be keeping a closer than usual eye on pricing in the single stocks — and the broader market — as the expiry draws closer.
“The investor will lose $1 billion if these trades do not expire in-the-money,” said Silverman.
Nasdaq Whale Theory for Tech Stock Surge Is Stirring Doubts
Here’s a selection of some of the trades cited by strategists:
Microsoft Nov. $220/$240 call spread initiated Aug. 5 that’s still open; price was $6.75, value is now near $7Facebook Nov. $250/$275 call spread initiated Aug. 5 that was bought for $10.50 and sold for $15.60 on Sept. 3 to buy a $295/$340 spreadSalesforce.com Nov. $200/$230 call spread initiated Aug. 5, bought at $12 and sold at $24.75 on Aug. 26 to buy the $250/$280 spreadAdobe Oct. $450/$490 call spread initiated Aug. 5 that’s still open; price was $17.20, value is near $23Alphabet Oct. $1650/$1950 call spread initiated Aug. 26; shares are lower since this tradeAdobe Oct. $520/$620 call spread initiated Aug. 26; shares are lower since this trade
(Updates with Nasdaq futures in third paragraph.)
For more articles like this, please visit us at bloomberg.com
©2020 Bloomberg L.P.