An end-of-week feeding frenzy in options of the world’s biggest companies has emerged as two of the hottest trends on Wall Street collide.
Rampant demand for Big Tech exposure is combining with the boom in fast-expiring options to fuel an explosion in bullish bets in the first few minutes of Friday trading. That’s the day that weekly contracts on individual stocks like Apple Inc. and Microsoft Corp. expire, effectively turning them into the zero-day options that have become a trader obsession.
Total call volume of the seven most-valuable tech firms — also including Alphabet Inc., Amazon.com Inc., Nvidia Corp., Meta Platforms Inc., and Tesla Inc. — last Friday spiked to 5 million contracts, doubling over the week, according to data compiled by Bloomberg. So frenzied is the late-week demand that some analysts see evidence it is moving the underlying stocks.
“Friday should be known as mega-cap tech call option day,” Brian Garrett, a managing director at Goldman Sachs Group Inc., wrote in a note last week. “There have been days where hundreds of thousands of calls have traded in the first 10-15 minutes of the session.”
Friday is set to be another busy session for Nvidia options after the stock surged as much as 26% on a robust sales forecast and traders flocked to the near-dated contracts. Less than an hour into Thursday’s trading, 1 million contracts changed hands, exceeding the average volume in the past 20 full sessions. All but two of the chipmaker’s most-traded options are maturing by Friday.
The foray into tech giants is the latest twist on the 0DTE phenomenon, which has until now been confined to options linked to major indexes and ETFs. At the moment, those are the only instruments that can expire any day of the week, providing the bulk of 0DTE trading opportunities.
For single stocks whose derivatives mature weekly, Friday’s deadline effectively makes those contracts 0DTEs for a day, offering a lucrative way to bet on a cohort of stocks whose returns have averaged a stunning 58% this year — a gain eight times as large as the S&P 500.
The appetite is evident in a chart tracking the total call volume of the Big Seven. Like clockwork, trading has reliably spiked on Friday. Fueling the pattern are retail investors whose options activity has shown a tendency to pivot toward the second half of a week.
Take Apple, Amazon, and Tesla. Over the past year, retail options transactions at Citadel Securities usually began the week in a subdued way and increased as the days went by. The volume peaked on Friday, when it was 1.7 times more than Monday’s, according to an analysis by Layla Royer, the firm’s senior equity derivatives salesperson.
Notably, the trio’s share returns have evolved in a similar fashion over the course of a week. On average they’ve fallen 0.6% in the first two days then risen 0.7% over the final three sessions.
“Positive stock performance appears to correlate to these retail options volumes spike in the latter half of the week,” Royer wrote in a note.
Source: Citadel Securities
Steve Sosnick, the chief strategist at Interactive Brokers, likens the rage in zero-day options to sports gambling in that both offer the potential for highly leveraged returns in a very short period of time. Yet unlike sports bettors whose action has no impact on the outcome, he posits, options traders can influence the movement of the underlying asset.
A similar dynamic was theorized during the 2021 meme-stock craze when large-scale purchases of bullish options for certain shares were used as a weapon to force actions by market makers that would turn small gains into big ones.
Whether driven by euphoria over artificial intelligence or the perceived safety during the latest banking turmoil, Apple and other tech behemoths have been the only game in town in 2023’s equity market. Hedge funds, for instance, have boosted their tech holdings to 15.5% of their overall single-stock net exposure, up from 9.7% at the start of the year, data compiled by Goldman’s prime brokerage show.
Source: Goldman Sachs. Hedge funds’ net exposure to tech mega caps
The love affair has found its way to the derivatives market. Last Friday, the Big Seven saw their total call volume outpacing puts by a ratio of 1.7 to 1, a three-month high, data compiled by Bloomberg show. For all Fridays, that’s the most bullish reading since 2021, when the tech was similarly ascendant because of the pandemic lockdown.
“With options, if enough punters show up on one side of the action, they can indeed influence the outcome,” Sosnick said. “And that’s why we see buyers jump in when the momentum seems favorable.”
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