Will retail traders’ option-fueled market stampede keep accelerating?

Retail traders had a great year because they bought the dip, stayed long AI stocks, rode momentum in precious metals, and took risky bets on speculative stocks that paid off.

Goldman Sachs’ baskets of retail favorites, high-beta momentum longs, and nonprofitable tech companies are all handily outpacing the S&P 500’s return year to date.

Retail trading activity is increasingly affecting how stocks trade on earnings releases and crowding institutional investors into their favorite stocks. It’s a force worth paying attention to.

The options market stands out as the place to go to monitor retail sentiment and desire to take risk. Call buying is a critical catalyst behind meme stock rallies and days when quantum computing companies go parabolic on absolutely zero news. The stock market can increasingly be viewed as a temperature check of companies whose long-term operational viability probably won’t be known for many years and whose near-term performance is governed by options with five days or fewer to expiration.

Obviously, not all calls are bought to open; many are sold as part of income-generating strategies. But you’d be hard-pressed to look at trends in call volumes and not see obvious parallels to the period that ran from the end of the pandemic-induced bear market to peak SPAC/GameStop in 2021. This was a stretch where speculative appetite was palpable, bankrolled by stimmies and inspired by Covid limiting most of everything else we’d want to do. We’re in the midst of a multiyear stretch of similar intensity.

So following this chart of median daily call volumes traded across US exchanges over the past three months will likely help answer a ton of questions, while raising others along the way:

Is the boom in speculative stocks still going strong?

If call activity is going down and key US stock indexes still go up, are retail traders really that important after all?

Are other opportunities for speculation (such as prediction markets) cannibalizing options activity?

Caveat: the increased availability of S&P index options, spreading to platforms like Robinhood, has definitely contributed to this boom, particularly for options with zero days to expiry.

(Robinhood Markets Inc. is the parent company of Sherwood Media, an independently operated media company subject to certain legal and regulatory restrictions.)