Day Traders, Nasdaq Whales Show Market-Moving Clout With Options

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Beyond all the wrangling over who caused the recent boom in options is a more fundamental debate: How much do they matter to stock prices, anyway?

Quite a bit, according to the academic research.

Conclusions have varied over the years, but the weight of evidence points to three main channels through which options can drive equity prices — all of which may have been at play of late.

Wall Street has been looking for culprits in an explosion in volatility, with September posting three of the worst days for technology stocks in 2020.

The first channel is informational, where derivatives activity — until recently assumed to be conducted by more informed traders — influences investor behavior elsewhere. The second is more direct, and sees options dealers buy and sell stocks to hedge their positions. And the third is a specific price impact on the day options expire.

What follows is a look at recent trends in the options space, and how they fit in with key research connecting derivatives to moves in their underlying stocks.

Signaling

Of all the twists in the saga of the U.S. stock market this quarter, one of the biggest was SoftBank Group Corp.’s purchase of billions of dollars worth of options on tech shares.

The Japanese investment giant bought and sold calls — contracts giving the right to buy a stock at a preset price — for a few megacap names. The idea was to profit if equities rose, but a side effect may have been to help make sure they did.

In a paper published at the start of the year, academics from the University of Miami, the Singapore Institute of Technology and the Singapore Management University argued options contracts play

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