$730 Billion Loss in NASDAQ Shares Shook the Global Market
Nasdaq’s nosedive offered severe lessons on how options-market leverage can blow up in the face of an investor. Losses in benchmark indices were devastating enough, hitting 6 percent in the Nasdaq 100, or erasing about $730 billion. They were downright suicidal in single-stock equity contracts, with certain instruments washed out within a few hours. In recent weeks, volumes inputs and especially calls have exploded, most of it in the tiny lot sizes that denote independent traders.
Although it is never problematic to find staggering losses in options when markets plunge, and there are plenty of examples of well-timed puts, the losses of this day have been especially terrifying in the long run. A call on Apple Inc.’s stock with a $125 strike price, expiring tomorrow, plummeted 89 percent as the stock fell 8 percent to $121. A bullish wager for Tesla Inc. to hit $500 by the expiry of Friday lost 90 percent as the stock fell to $407 by nine percent. And a bid to Zoom Video Communications Inc. with a $420 strike price turned out to be virtually worthless as shares reached $381.
The hazards associated with poorly timed trade-in options are lethal. How well newbie traders comprehend them is a discussion point on Wall Street, where veterans looked on with suspicion as small investors spent August brandishing evidence of their winnings on Twitter. Whether or not small-time day traders predict the dangers, they achieve a more proper understanding after Thursday. According to Alon Rosin, head of institutional equity derivatives at Oppenheimer, this is the first feeling of pain for many current investors.
Independent investors’ interest in the options market is increasing. Volumes for sole stock options with fewer than two weeks to maturity now make up 69 percent of the number of options. It is not far from a high of 75 percent in late July which obtains a record in data from Goldman Sachs back to 2013.
According to BTIG LLC, the short-dated nature of the contracts is a tell-tale indication of retail traders. The retail investor represents a heavy buyer of upside call options, the short-dated weeklies, and daily. That’s the trend anyone didn’t observe exactly in 2000 because at that point nobody had weekly options but that kind of excitement was part of what they saw in 2000.
The technology-heavy Nasdaq 100 has fallen the most since March, after rising in 11 of the last 13 sessions to break almost daily records. The high-flying mega-cap winners led the carnage, pushing Nasdaq’s relative dominance over the S&P 500 to the highest on record after their relentless rally. Day dealers burned by a sudden drop quickly turned to the Internet.
No matter how people on the Internet react, in a year like this, it’s hard to picture the plunge as being out of the blue. And that’s how it goes, and the issue is the same thing will happen on the downside, and that’s what they’re witnessing.
