Powell's speech triggered record options bets, topping even the meme stock frenzy

A trader works on the floor of the New York Stock Exchange (NYSE) as a screen shows Federal Reserve Board Chairman Jerome Powell during a news conference following a Fed rate announcement, in New York City, February 1, 2023.
Andrew Kelly | Reuters

A speculative frenzy after Fed Chairman Jerome Powell spoke last week helped drive record trading in call options Thursday, and there could be more Powell-related options action Tuesday as investors await his midday speech. 

But the record volume in call options on stocks last week may also be the sign of a medium-term peak in speculative behavior, according to Julian Emanuel, head of equity, derivatives and quantitative research at Evercore ISI.

"A contrary indicator?" he asked in a note, adding that the previous record amount of call buying activity was in January 2021 just as the meme stock frenzy peaked.

According to Susquehanna, 40 million call options were traded last Thursday. Stocks continued a two-day rally that day on Powell's dovish comments made during his Wednesday afternoon press briefing.

Those options were big market bets, like in the SPDR S&P 500 ETF and Invesco QQQ Trust, which represents the Nasdaq 100. But they also focused on the three big tech stocks that were reporting earnings after Thursday's bell – Apple, Alphabet and Amazon, according to Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.

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Much of the volume was in zero-day to expiration options, which expire on the same day. An investor buying a call option makes a bet that the stock or ETF the option is on will rise, so investors in the one-day options were expecting an intraday pop.

"There was a ton of near-term call volume when the market was having all that positive momentum, pre- the NFP [jobs report] throwing cold water on it," Murphy said. "It was a little bit of a perfect storm with a couple of those different factors. When momentum to the upside accelerates, this is just a new phenomena. We saw a ton of it in 2021. Not so much last year. And now we're seeing it come back."

Murphy said the action was muted Monday, but he said investors were now focused on Powell's 12:40 p.m. ET appearance Tuesday at the Economic Club of Washington D.C.

Investors are wondering whether Powell will reverse any of the comments he made Wednesday, when he said he was gratified to see the trend of disinflation. He mentioned "disinflation" numerous times, and strategists said it encouraged investors to believe the Fed is winning the war on inflation and it could soon pause its rate hiking.

But Friday's bombshell of a jobs report reversed some of that as investors worried the labor market may be too hot and generate more inflation. There were 517,000 payrolls added in January, nearly triple expectations.

"Today just happens to be a quieter day because we have Powell tomorrow," said Murphy. He said the SPDR S&P 500 ETF and Tesla were the most active options. On any given day, the S&P 500 ETF, the QQQ, Tesla and Apple can be in the top five, he added.

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Murphy said Thursday's volume in call volume surpassed the 38 million on Jan. 27, 2021.

Of the 40 million calls traded last Thursday, a relatively small number became longer-term positions. According to Murphy, open interest, or the amount of options outstanding on the exchanges, grew by just 6.3 million. There were also 28 million puts traded that day, and open interest expanded by 7 million puts. A put is a bet that a stock or ETF will fall in value.

"It's more like day trading," said Murphy of the single-day options plays. "There's so much liquidity in the options that you don't really need to day trade in the stocks."

Murphy said he expects to see trading in SPY, the S&P 500 ETF, around Powell's speech. He said if an options investor in the one-day options were betting Powell will say something that would create a negative reaction, they could buy a put on the ETF.

He said for instance, the ETF was last at $400 early last week, and if an investor wanted to bet the SPY ETF would fall back down to that level after Powell, investors could buy the option for 10 cents Monday afternoon. SPY closed at $409.83 Monday.

If the market began to fall as Powell spoke, and the option became more valuable, investors could sell the option at its higher price.

Murphy said the volume spike last week does seem to indicate a near-term top in some speculative behavior.

"It hasn't happened enough times to have a real track record," he said. "The reality is if you bought the stock market in January 2021 and held onto it for any time period, you would be happy."