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Individual Investors Step Back From Options Bets

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Those individual investors had embraced options as a way of riding the stock market’s momentum that drove shares of companies from Apple Inc. to

Nvidia Corp.

to new heights. Now, the Federal Reserve’s move to raise interest rates to tame inflation has thrown that dynamic into reverse, sending the prices of stocks skidding.

Individual investors made up 26% of total options activity in March, down from nearly 30% early last year. That marked the lowest level since March 2020, though was still well above prepandemic levels, according to calculations by Bloomberg Intelligence’s

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Larry Tabb,

who analyzed figures from the 12 largest online brokers.

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

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A punishing stretch of volatility has prompted many individual investors to abandon a host of momentum trades such as blank-check companies known as SPACs, crypto plays like nonfungible tokens and unprofitable technology companies. The aversion to risk has rippled out through markets, dragging down the S&P 500 16% this year. Many pandemic-era darlings like

Netflix Inc.

and

PayPal Holdings Inc.

have fallen much further.

“There was a real herd behavior” last year, said

Viraj Patel,

a global macro strategist at Vanda Research in London. “It’s really hard to pick who’s going to be winning in this environment.” 

In the week ahead, investors will be parsing commentary from Federal Reserve speakers as well as data on the housing market and consumer spending for clues on the path of interest rates and the economy. The Fed has become the driving force in markets, with many investors fearing its quest to tame inflation will result in a recession. They are also worried by the war in Ukraine, lockdowns in China and continued supply-chain disruptions globally. 

In light of this, the share of bullish call-options trades by individual investors has plunged to the lowest level since April 2020, another sharp reversal since the onset of the pandemic. Investors had rushed to scoop up options tied to companies like electric-vehicle maker Nio Inc. and

GameStop Corp.

as a way to turbocharge their bets that the stocks would keep rising. Those trades have slipped in popularity as the stocks have fallen 55% and 34%, respectively, this year.

“Last year, I would be much more aggressive,” said

Steve Dez,

a 30-year-old actor who travels between California and Puerto Rico, of his options trading. This year, “the momentum loses steam quicker.” 

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

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