Exclusive – Some on Wall Street are trying options trading to bet against AMC without getting burned
NEW YORK (Reuters) – Some Wall Street traders are betting against another massive rally of AMC Entertainment Holdings Inc and other “meme” stocks this week thanks to a type of bet in the options market that would limit their losses if retail investors were behind the race – to the point of proving them wrong.
Reuters analysis of options data and interviews with market participants, including a Wall Street banker and a fund manager with $ 30 billion in assets, show some institutional investors have stepped up complex options trades that allow them to bet that stocks will fall.
The so-called “bear put spread”, a common bearish options strategy, also limits profits.
Its increased use now, which has not been reported before, shows how Wall Street is looking for ways to profit from the unprecedented surge in retailing, but is advancing cautiously after some top funds were shaken earlier this year.
“It is still dominated by these small retail businesses, but we are seeing sporadic large institutions tempted only by price,” said Henry Schwartz, head of product intelligence at Cboe Global Markets Inc, referring to trading in ‘options in AMC.
AMC was at the center of a second wave of buying by retail investors who promoted stocks in forums such as Reddit’s WallStreetBets, bringing new life to the “same stock” phenomenon that drove stocks higher. from video game retailer GameStop Corp. in January.
AMC stock rose just over 83% last week. The stock has jumped 2,160% this year, leaving traders with outright bets against it, paper losses of nearly $ 4 billion, according to the latest available data from S3 Partners.
When a stock moves as much as AMC last week – sometimes more than doubling its price in a single trading session – it drives up the price of options.
Typically, moves of this magnitude do not persist for long periods of time, and some professional traders are betting they will this time around, meaning the stock price will fall, market participants said.
The problem is, they don’t know when it might happen and if they have the resources to stand their ground in a prolonged confrontation with retail traders, whose power lies in their numbers.
This is where a downward selling gap comes in. In the trading strategy, the investor buys a set of sales contracts, which gives him the right to sell the underlying stocks at a certain “strike” price at a certain time, and sells another set with a lower strike price valid for the same period.
The sale of put options offsets most of the initial cost of buying the first set of contracts. If the stocks do not fall, or fall less than expected, the trader’s losses resulting from the purchase of the put option will be covered to a large extent by the proceeds of the put option written.
The banker, a senior executive at a large Wall Street firm, said the majority of his institutional clients stay away from stocks even, but some have started using bearish selling spreads to bet against them. The New York-based fund manager said he was using sell spreads to minimize risk and lower costs by betting on AMC and other memes stocks.
Both requested anonymity as they were not authorized to speak to the press.
Options trading data shows an increase in complex transactions that involve strategies such as sell spreads. These trades, generally favored by professional traders, accounted for 22% of AMC’s daily trades, on average, this week, compared to 13% for the month of May, according to options analysis firm Trade Alert.
Overall, stock options trading remains largely dominated by retail traders, according to the data. Only around 10% to 15% of the overall daily AMC options volume this week was traded in blocks of over 100 contracts, a size typically associated with professional players.
“It’s hard for institutions to stay on the sidelines when volatility hits this level,” Cboe’s Schwartz said. “They try to avoid it, but it attracts them.”
Sinead Carew Supplementary Reports; Editing by Paritosh Bansal and Sonya Hepinstall