Some Wall Street retailers are betting on another mass rally at AMC Entertainment Holdings Inc (AMC.N) and other shares of the memes this week with a bet on the options market that would limit their losses if retail investors stand behind the preparation prove them that they are wrong.
The so-called “bear spread”, a common strategy for bear options, also limits profits.
Its increased use now, which has not been reported before, shows how Wall Street is looking for ways to take advantage of the unprecedented growth of retail, but is stepping carefully after some high-ranking funds were beaten earlier this year.
“Certainly these small retail deals still dominate, but we see sporadic large institutions tempted only by pricing,” said Henry Schwartz, head of product intelligence at Cboe Global Markets Inc, citing options trading at AMC.
AMC is at the center of a second wave of purchases by retail investors who are pushing shares in forums like Reddit’s WallStreetBets, giving new life to the “meme stock” phenomenon that sent shares to video game retailer GameStop Corp (GME. H) growth of 1600% in January.
Shares of AMC rose just over 83% last week. Shares have risen 2160% this year, leaving traders with outright bets against it, caring for losses of nearly $ 4 billion, according to the latest available data from S3 Partners.
When stocks move as much as AMC last week – many times more than doubling the price in one trading session – it raises the price of options.
Usually, movements of this scale do not continue for a long period of time and some professional traders bet that this time it will be so, which means that the stock price will fall, market participants said.
The problem is that they do not know when this may happen and whether they have the resources to defend their positions in a lengthy meeting with their retailers, whose strength is in their numbers.
Here comes the spread for bear paths. In the trading strategy, the investor buys a set of put contracts, which entitles them to sell the underlying shares at a certain “strike” price for a certain period of time and sells another set with a lower strike price valid for the same period of time.
The sale of put options offsets most of the upfront costs of purchasing the first set of contracts. If the shares do not fall or fall less than expected, the trader’s losses from the purchase of the put will be largely covered by the proceeds from the sale of the put.
The banker, a senior executive at a large Wall Street firm, said most of his institutional clients stay away from meme stocks, but some have begun using bearish spreads to bet against them. The New York-based fund manager said he used put spreads to minimize risk and reduce costs while betting on AMC and other memes.
They both requested anonymity because they were not authorized to speak to the press.
Options trading data shows increased complex trades that include strategies such as put spreads. Such trades, typically preferred by professional traders, account for an average of 22% of daily AMC trades this week, up from 13% in May, according to trade options trading company Alert.
The data show that total stock options trading remains largely managed by retailers. Only about 10% to 15% of the total daily volume of AMC options this week was traded in blocks with more than 100 contracts, a size usually associated with professional players.
“It’s hard for institutions to stand aside when instability gets so high,” said Schwartz of Cboe. “They try to avoid it, but it attracts them.”
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