Buy Calls, Champion in Reddit, Hope Others and Machines Join the Trend.

Bloomberg Businessweek March 2, 2020 pp18-20 Finance “Trolls Come to The Stock Market”. “Think retail investors are still bored with the long bull market? Check out Reddit"

Shades of the 1990s investor chat rooms, retail traders are back and possibly influencing the run up of selected stocks-some 900,000 are subscribed to the Reddit sub know as r/wallstreetbets or r/wsb. In r/wsb, anyone can promote their theories related to a stock but per Reddit rules not in a profit-making "get-rich-quick-scheme" way.

Because many stocks are priced high these days, a retail trader can get more leverage buying Call Option Contracts-for a small price you can wager on high value stocks for a fraction of the share cost. Benefits accrue to the buyer, however, only if the underlying security rises in price during the call contract period. Option dealers protect their position by buying a proportionate amount of the underlying stock. If the stock rises, dealers enjoy gain as well and then payoff calls that are “in the money”. If the stock falls below the strike price, for any option contract, the dealer holds the security still and benefits from not having to payout the call option.

As you might surmise, lower priced stocks are more likely to be significantly driven up in this way. You can imagine an issue championed within r/wsb might rise from that group of 900,000 members, then from dealer buying-as they hedge, followed by reactionary “machine buying”and finally through other buyers hoping to ride the momentum.

These recent efforts, by retail traders, have influenced the option markets so significantly as evidenced by Call Option demand exceeding Put Option demand. Unlike Call Options contracts, which are bets on a rising stock price, Put Options contracts are securities betting on a diminishing stock price.

Some believe “The forum’s zest for call options is a key force behind a broad market trend”. “By one measure, the value of option contracts rose 77% over the first six weeks of 2020. Three successful individual examples touted in r/wsb recently were Virgin Galactic ~$10 Jan 2 and ~$35 Feb 26, Plug Power ~$3 Jan 2 and ~$5.7 Feb 26 and Lumber Liquidators a low of ~$7 and ~$11 early March.