AMC is a puppet of the options market

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Hello. After yesterday’s unsuccessful attempt to rationalize the behavior of AMC’s investors, I bow today to mad speculators, especially those who trade options. Maybe rationality will come back to the menu next week.

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AMC again

So to be honest:

It’s been three days! It’s $ 30. No, it’s $ 72. There is not $ 38. I really mean it this time. No, I’m sorry, but it’s definitely $ 68. Okay, good, $ 50. (Graphics are Refinitiv.)

I tried to figure out yesterday What was going on Compare with AMC stock in terms of the economic virtues that investors can see in the business. It was an idiot’s race. Also, I ignored the gorillas in the room while discussing the stock madness, the options market.

This is a broad (but not universal) truth. Same stock It is at least partially under the control of the options market. There are several control mechanisms. The simplest is information. When stock market investors see many calls, they anticipate future stock purchases and try to anticipate them.

Another tricky mechanism is the blanket. If an investor who wants to speculate on a stock buys a call option for it, the market maker who sold them the option does not want to take the other side of the trade. Ideally, another client would take the opposite position in put options, allowing market makers to obtain a risk-free spread. However, if there are more buy requests than sells, say from many crazy retail investors, brokers can buy the underlying asset as a hedge. Important Details: If the share price rises, the market maker will need to buy more shares to allow for hedging. This fuels the rise in stocks, requires more buying for cover, and continues indefinitely. Stocks temporarily become puppets in the options market.

So is AMC Baccanal an optional puppet show?

Garrett DeSimone, head of quantitative research at OptionMetrics, an options data and analysis company, said the AMC options market was eccentric. When we spoke on Thursday, the stock price volatility implied by AMC option prices was around 300%. Recently it hit 800% at one point. He states that these numbers are “very crazy” and that it is difficult to immediately estimate the impact of the underlying asset on the share price.

DeSimone sent us data on call and put call volume that I compared to stock prices by the end of Wednesday. Each unit of volume is a standard contract for the right to buy and sell 100 shares.

This correlation is not perfect, but it is certainly suggestive.

How many of them are traded in retail options? Now OptionMetrics tracks retail options (less than 10 contracts) as an alternative to retail purchases. The quantity of small batches after March is as follows. Recently it has grown faster.

I tell Desimone that the stock market meme is always a story of individual investors beating institutional investors by “resuming” trades in their own name, or of professionals making money from individual driven volatility. He was asked if he had found a way. He said:

“The market is still trying to figure this out… In an environment with 800% volatility, the old rules don’t apply. In my opinion, many retail investors continue to have this problem. The institution will always understand it first. “

I also spoke Lily francas And Alex goode, An independent options trader, member of Finzottati. They were convinced that option-based trades represented a “significant portion” of Wednesday’s trading at AMC. They also made an interesting observation: Market makers were “surprised” by the whirlwind of previous stock memes, but this time, market makers (such as Citadel Securities and Jane Street) have said Good’s words. I am definitely throwing money. “

What is their proof for this? Optional reduction of the bid ask spread. “This shows that market makers are active and trade on both sides of the options market,” Francus said. The narrow spreads avoid the risk of market makers in AMC’s options business. It does not mean that you are actively competing.

Of course, market makers aren’t the only ones making money in this madhouse: AMC announced Yesterday, we announced that we were going to sell an additional 25 million shares to the public. And why do they stop there?

See more housing data

Last week, I wrote that house prices in the United States are skyrocketing, and I questioned the role that institutional capital inflows have played there. In order to track institutional investor funds flowing into housing, I used data from the Mortgage Bankers Association and non-residents studied the number of new mortgages borrowed. The data looks like this:

After all, there is another good source of data showing that an even larger share of the US market is owned by investors. John Burns Real Estate Consulting tracks non-homeowner purchases by looking at the number of homes where the real estate taxpayer’s address is different from the home’s own address. This captures cash purchases that cannot be achieved with MBA data. Burns has just totaled the numbers for the first quarter. here you are:

Astonishing numbers: in Phoenix, New York, Austin, Tampa and Las Vegas, about a third of the market is made up of investors. However, if we look at national trends in investor ownership, it appears to be stable over time.

Rick Palacios, Research Manager at Burns, emphasizes an important point. From 2010 to 2015, when the proportion of purchases by investors was higher than today, it is because purchases by residents fell sharply and that institutional and rental investors became the majority in the field. is. But now the busy market is bright red, and owner-investors still make up a quarter of the market. He views institutional interest in US residential real estate as a “maniac.”

Will hot money (then the over-leveraged house flippers, now the yield-seeking institutional investors) quickly pull away from the market and lead to a fall? ?? Palacios does not think:

” Hundreds [institutional investment] A platform that leaves a lasting mark on the single-family home market. They stay here. .. Their investment period is several decades. Our point of view is that it is [capital] It is in circulation over the long term and will structurally change the market. “

Good reading

It’s a physical pain to recommend the work of my competitor John Authers in Bloomberg, but my conscience wants to point out what he wrote. Newsletter If you haven’t read it yet, you should read it a few days in advance. This is the relationship between fixed income, stocks and inflation, and is an excerpt from a very good report by Absolute Strategy Research. If this argument is correct, we could go on for years if rising inflation changes the relationship between bonds and stock prices.

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