Are Stocks in a Bubble? How Options Are Driving Markets Higher

A swell of individual investors are betting that stocks will go up. It’s enough to make their expectations into reality. For now, at least.

By Matt Phillips

The stock market is near record heights, and optimism abounds. Coronavirus vaccines are finally getting jabbed into arms. Interest rates are at historic lows. And the Democrats who control Washington are expected to pour another trillion dollars or so into the still-struggling economy.

But it’s getting increasingly difficult to overlook signs that investors are taking things too far, too fast — as history shows they sometimes do.

The latest signal is from the somewhat obscure market for stock options, where traders can place bets with brokers that a stock will rise or fall. Speculation has reached a frenzied level not seen since the tail end of the dot-com boom two decades ago. That enthusiasm is having a growing influence over the regular stock market itself.

“If you’re betting on sports, the amount of people on one side of the bet or another can only influence the odds, not the outcome,” said Steve Sosnick, chief strategist at Interactive Brokers in Greenwich, Conn., a major options brokerage. “In the case of options, it can actually change the outcome.”

Over the past year, and even during the deep uncertainty that flummoxed the market at the start of the pandemic, so-called retail investors — individuals, often with little experience — have been pouring into the market. What has lured them varies: free trades, extra cash from relief payments or even an itch for action with most sports leagues shut down.

Options trading hit a record in 2020, with some 7.47 billion contracts traded, according to the Options Clearing Corporation. That’s a 45 percent increase compared with the previous record, set in 2018.

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