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Some Wall Street traders are betting against yet another massive rally in AMC Entertainment Holdings Inc and other memes this week, betting in the options market that will limit their losses if the retail investors behind the rally prove they wrong.
Analysis of Reuters options data and interviews with market participants, including a Wall Street banker and a $ 30 billion fund manager, show that some institutional investors have stepped up complex options trades, allowing them to gamble on falling stocks.
The so-called bearish put spread, a common bearish options strategy, also limits profits.
Its current, unreported increased use shows how Wall Street is looking for ways to capitalize on unprecedented retail growth, acting cautiously after some large funds went bankrupt earlier this year.
“It’s still dominated by these small retail deals, but we’re seeing sporadic large institutions lured only by prices,” said Henry Schwartz, head of product analytics at Cboe Global Markets Inc, referring to options trading at AMC.
AMC found itself at the center of a second wave of buying from retail investors, who advertised shares on forums such as WallStreetBets Reddit, giving new life to the “meme stock” phenomenon that saw video game retailer GameStop Corp. rallied 1,600 percent. in January.
AMC shares are up just over 83 percent last week.
Stocks are up 2,160 percent this year, according to the latest available data from S3 Partners, causing traders to bet directly against them, incurring paper losses of nearly $ 4 billion.
When a stock moves as hard as the AMC last week – sometimes more than doubling in price in a single trading session – it drives up the price of options.
Usually, movements of this magnitude do not persist for extended periods of time, and some professional traders are betting on what will happen this time, which means that the share price will fall, market participants said.
The problem is that they do not know when this might happen or if they have the resources to defend their position in the long-term confrontation with retailers whose strength lies in their numbers.
This is where the bearish put spread comes in. In a trading strategy, an investor buys one set of put contracts, which entitles him to sell the underlying stock at a certain strike price by a certain time, and sells a different set with a lower strike price valid for the same time period.
Selling put options offset most of the initial cost of purchasing the first set of contracts. Unless the stock falls or falls less than expected, the trader’s losses from buying a put will be largely offset by the proceeds from the sold put.
The banker, a senior executive at a large Wall Street firm, said most of his institutional clients stayed away from meme stocks, but some began using bearish put spreads to bet against them. The New York-based fund manager said he used put spreads to minimize his risk and cut costs when he bet on AMC and other meme stocks.
Both asked to remain anonymous because they were not allowed to communicate with the press.
Options trading data shows an increase in the number of complex trades that use strategies such as put spreads. Typically preferred by professional traders, these trades averaged 22 percent of AMC’s daily trades this week, up from 13 percent in May, according to analyst firm Trade Alert.
The data shows that in general, stock options trading continues to be largely driven by retail traders. Only 10 to 15 percent of the total daily volume of AMC options this week were traded in blocks of over 100 contracts, a size typically found in professional gamblers.
“It’s hard for institutions to stand aside when volatility gets so high,” said Cboe’s Schwartz. “They try to avoid it, but it attracts them.”
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