Individual investors are stepping back from options betting

Those individual investors had embraced options as a way to leverage the stock market momentum that shares of Apple Inc. companies. floated to Nvidia Corp

to new heights. Now the Federal Reserve’s move to raise interest rates to curb inflation has reversed that dynamic, causing stock prices to slip.

Individual investors accounted for 26% of total option activity in March, up from nearly 30% at the beginning of last year. That was the lowest level since March 2020, although it was still well above prepandemic levels, according to calculations by Larry Tabb of Bloomberg Intelligence, who analyzed figures from the 12 largest online brokers.

Meanwhile, their share of trading activity hit a low of 10.7% in January, based on data from the largest brokers. Activity has increased slightly since then, but remains below last year’s level when it peaked at 21%.

Severe volatility has led many individual investors to abandon a large number of momentum trades, such as blank check companies known as SPACs, crypto games as non-replaceable tokens, and unprofitable technology companies. Risk aversion seeped through the markets, pushing the S&P 500 down 16% this year. Many darlings of the pandemic era, such as Netflix Inc

and PayPal Holdings Inc

have fallen much further.

“There was real herd behavior last year,” said Viraj Patel, a global macro strategist at Vanda Research in London. “It’s really hard to choose who’s going to win in this environment.”

In the coming week, investors will analyze commentary from Federal Reserve speakers and data on housing and consumer spending to get clues about the path of interest rates and the economy. The Fed has become the driving force in the markets, with many investors fearing that its drive to tame inflation will lead to a recession. They are also concerned about the war in Ukraine, the lockdowns in China and ongoing supply chain disruptions worldwide.

In light of this, the share of bullish call option trades by individual investors has fallen to its lowest level since April 2020, another sharp turnaround since the start of the pandemic. Investors had rushed to pick up options tied to companies such as electric vehicle manufacturer Nio Inc. and GameStop Corp.

as a way to boost their bets that the stock would continue to rise. Those trades have declined in popularity as stocks have fallen 55% and 34% respectively this year.

“Last year I would be much more aggressive,” Steve Dez, a 30-year-old actor who travels between California and Puerto Rico, said of his options trading. This year, “the momentum is losing steam faster.”

Calls give investors the right, but not the obligation, to buy shares at specified prices by a specified date. Because options allow traders to put down a relatively small sum of cash for potentially huge returns if their bets are correct, investors can use them to increase profits. However, the options may expire worthless and investors may lose their initial investments.

“Across the industry [retail] options volume has declined somewhat,” said Shawn Cruz, chief trading strategist at TD Ameritrade. “Retail customers are moving from single-name stock options to broader macro-based options like [exchange-traded funds] and index options.”

According to data from Vanda Research, individual investors have also increased their exposure to exchange-traded funds. Funds that track the S&P 500 and Nasdaq-100 indices, in addition to those with turbocharged exposure to technology stocks, were among the most popular. That helped individual investor purchases of ETFs hit an eight-year high in early May.

Paul Soucy, a 65-year-old retired teacher in Cape Cod, said he has switched from trading meme stocks like AMC Entertainment Holdings Inc.

and SPACs to acquire shares of consumer goods such as snack food company Mondelez International Inc. to buy

and dividend-paying stocks that he thinks will do well if inflation rises.

Mr. Soucy said he was alarmed by some of the sharp declines after earnings in individual stocks, making the market more unpredictable and harder to trade in options and stocks.

“The market has been a little crazy,” Mr. Soucy said. “Some months things weren’t going so well for me.”

Of course, some strategies from last year have retained their appeal. Many individual investors have continued to buy from the stock market dip this year, leading to record buying. Even meme stocks have come back roaring at times. And buying large technology stocks remains popular despite the volatility, according to Vanda Research.

One trade in particular shows no signs of slowing down. Options on Tesla Inc

have remained the most popular with individual investors this year, Vanda Research estimates, as they did last year. Shares of the company are down 27% this year.

Write to Gunjan Banerji at [email protected]

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