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Morning Brief: Meme trade is making stock options great again

Yahoo Finance's Myles Udland, Brian Sozzi and Julie Hyman break down why the meme trade is here to stay.

Video Transcript

[MUSIC PLAYING]

JULIE HYMAN: But we start, as we frequently do at this hour, with the Morning Brief. And as usual, Myles is thinking about meme stocks, but thinking about them from a sort of different perspective, as we watch GameStop fall out of its earnings today. There is a big options-related dispersion in the potential outcomes in the shares following the earnings. I was noticing this morning, something like 20% is the amount it could move following the numbers.

And we haven't talked as much about the whole options phenomenon around what we have seen in these meme stocks. That's something you wrote about this morning, Myles, as well as the idea that what turns out now to be perhaps a false idea that, once things were going to reopen again, people would get away from their trading screens and away from meme stocks.

MYLES UDLAND: Yeah, so this report comes to us from the team over at Deutsche Bank, who's really been on top of following the meme trade. Big shout at Parag Thatte and the whole equity strategy team over there. And they had a note out, as they do at the end of each week, about flows and where investors are positioned right now, how overweight they are equities and so on and so forth.

And one chart that they have flagged and tracked, really for the last several months, is single stock call options. So this is a bet on-- it's a contract that gives you the right but not the obligation to buy a stock at a future point in time. And in general, if you are buying a single stock call option, in general, you are saying, in general, you think that that stock is probably going to go up.

So the blue line here is a spike in single stock call option activity within the market. Now, this was a major feature of the first go-around of the meme rally. That is where a lot of the confusion and struggles from investors, individual investors who were using options on Robinhood-- and most platforms require you to go through a whole educational thing before you can start trading options because it is not as simple as just buying or selling traditional equities.

Robinhood was allowing pretty much anybody to trade options. It was a big part of that trade. And the thesis here from the team at DB is that this is a big part of how retail is trying to amplify their gains within the market. And this purple line is mobility. So how much were people at home? How much did they have nothing else to do?

It was winter. COVID cases were spiking restrictions were in place in most major cities. The thinking being, well, people were at home. They were bored. They were looking to play a market that had a lot of excitement. They were able to do that through options. And so as mobility increased, as the economy reopened, we saw options activity come down.

What is interesting at this point in time-- and it does beg the question, as you suggested earlier, Julie, are pros now getting into the market and acting the way retail previously did? Because that options activity has come back in a massive way while mobility has increased.

So you've got a few potential outcomes here, a few potential read-throughs on this data. There was a suggestion from the team at Deutsche Bank that maybe retail hasn't left the market in the size you would have suspected as other activities became viable. Deutsche Bank itself ran a survey back in February that suggested that retail investors were not going to leave this market. But it also opens up the possibility, again, that hedge funds and traders and institutions and discretionary traders in the market-- and it's a dwindling market but still sizable in terms of how many folks are doing it, how much money they can throw around.

Maybe they're just buying single stock options because they saw the retail kids do it. And they're like screw it, let's go for it. Let's have some fun here. Let's see how we can try to layer ourselves on top of this meme market.

And I'm not sure that we're going to ever know what the definitive answer is there. Is it all retail? Is it all hedge funds pretending to be retail? Is it neither of those outcomes?

All we know for sure is that the amount of call option activity in the market has spiked considerably in the last couple of days. All else equal, that creates more volatility in the underlying assets against which those options contracts are being written. And so I think that's why we continue to see the meme market, on a daily basis, rotating with such enthusiasm and such speed through so many of these names.

I mean, just look at what we're seeing in Clovis and Clover today, we saw on Wendy's yesterday, we're seeing in Wish today, we're seeing in AMC to the downside today. I mean, the list goes on and on and on of names that are moving 10-plus percentage points up and down. And the only thing we know is that people are talking about those names.

And here we have Clover off its highs. Now it's only up 1% after having been up 20%, so on and so forth.

JULIE HYMAN: Yeah, I mean, I would say the other thing in favor of the theory or the thinking that perhaps it's broader than just retail participation is the fact that the overall market has gone not much of anywhere over the past two months, right? So if you were trying to get upside, you had to get a little bit creative in this market. You couldn't just think very high-level here.

So that's something also that potentially speaks in favor-- also the size that we are seeing in these options plays also potentially speaks to that. And of course, we have the example of Jason Mudrick and Mudrick Capital who very publicly got quickly in and out of GameStop. We don't know what he's doing not publicly, right? That was of such a size that it was disclosed by the company. But a lot of what these hedge fund guys do doesn't have to be disclosed because it's not large enough, or it's not longstanding enough. So as you say, we might never know.

Sozzi, what do you make of all this?

BRIAN SOZZI: I mean, my question is for Myles. Myles, do you think it's just time to put to bed this notion that, as the economy opens, people will no longer be invested in the stock market? Look, I can go onto the Yahoo Finance App, build my model portfolios, watch us live, check stock prices. I could trade on Robinhood. Even if I'm out at a Disney amusement park, I think I would still be engaged in my portfolio.

MYLES UDLAND: Yeah, I think that's completely right, Sozzi. And I think the reason why-- and we wrote about this, you and I both-- all three of us wrote about this through last year. And the data is quite clear. And there's a lot of reasons why.

But pretty much, everybody who was in the market last year made money. Maybe they didn't outperform the overall market. But it was something like 95% of stocks, individual stocks in the S&P 500 were higher last year. Pretty much nothing went down.

So people who got into the market for whatever reason-- they were bored. They had the discretionary income. They got their stimulus check. They're seeing everybody else get in the market. Almost all of those people made some amount of money.

Now, professional investors, they're following the benchmark, blah, blah, blah. But if you're a regular person, you get in the market the first time, you make 20% in a year, you're like, this is great. And there's no reason to not continue following that and to not continue to stay invested and stay interested, Sozzi, in the market.

And so I totally agree that, at this point, it really strains credulity to say a reopened economy is going to, en masse, see folks leave the stock market. I just don't see it right now. Maybe there might be some other point in time when people lose interest. But the reopening of the economy, to me, is clearly not going to be a trigger for that.

JULIE HYMAN: Well, it's also because you have your phone everywhere. And you can trade on your phone. So even if you are out and about-- this is not to say people are at home on their computers, right? They have their trading with them.

MYLES UDLAND: Right. And it's like, oh, well, they're working from home. So they can trade because the boss isn't looking over their shoulder. But to your point, Julie, you just open your phone at your desk. Don't connect to the corporate Wi-Fi or whatever it is that doesn't let you access your broker, blah, blah, blah.

It's not that hard to get an internet connection where you can execute trades and see what your portfolio is doing. So again, I think that, look, the market is really interesting. I think the three of us would agree with that. And people who start to wake up to seeing what happens in the market on a daily basis are probably, in general, going to be interested in it because it is a fascinating place to spend your time thinking about and watching and observing. And of course, you can participate as well.