NEW YORK (Reuters) – Options investors, who helped push technology stocks to record highs with buying sprees earlier this year, are now taking aim at small-cap and other economically sensitive companies, reflecting a broader rotation into value shares on news of an effective COVID-19 vaccine.
Demand for call options, used to position for gains in equities, has surged in the past week among travel and leisure companies whose shares slid under months of coronavirus-fueled lockdowns and travel restrictions, including United Airlines Holdings Inc <UAL.O>, Marriott International Inc <MAR.O> and Wynn Resorts Ltd <WYNN.O>.
Options activity also points to improving sentiment toward small-cap stocks, whose performance is closely tied to views on the U.S. economy.
Skew – which measures demand for put options used to protect against downside – has dropped sharply in the past week for the small-cap focused iShares Russell 2000 ETF <IWM.P>, reflecting a relative increase in bets on gains.
The options activity mirrors recent trading in broader U.S. equity markets, where investors rotated from growth to value shares on Monday after Pfizer Inc <PFE.N> said its experimental COVID-19 vaccine was more than 90% effective.
The small-cap Russell 2000 <.RUT> surged 3.7% and the S&P 500 <.SPX> and Dow Jones Industrial Average <.DJI> rose close to record highs as the vaccine news sparked hopes of a quicker path to a full economic re-opening and recovery. Meanwhile, the tech-heavy Nasdaq <.IXIC> fell.
Both U.S. equities and options markets saw surges in trading volume on Monday, with options volume posting a record. More than 48 million options contracts traded, according to data from the Options Clearing Corporation.
The rotation continued Tuesday as the Russell 2000 continued to outperform, rising 1.9%. The S&P 500 fell marginally, while the Nasdaq dropped 1.4%.
The rotation could spark a rush to call options in travel, leisure and other cyclical names, similar to that seen in August with tech-related names, especially as more individual investors participate, said Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets.
“I think that retail traders … are ‘equal opportunity’ in their call exuberance,” she wrote in an email to Reuters.
So far, the activity in options linked to value shares has not reached the frenzied levels seen around tech-related stocks this year. Investors said they were unsure whether the shift to cyclical and small-cap shares will sustain itself.
Several previous rallies in value stocks have wilted throughout the year, and their long-term performance lags their growth-focused peers.
The drop in skew may indicate hesitancy to buy the underlying stocks given that their outperformance has often been fleeting, said Christopher Jacobson, co-head of derivatives strategy at Susquehanna Financial Group. Calls require a smaller investment.
“Give that investors have already seen several cyclical head-fakes this year, it’s not surprising that some of the trading continues to reflect a more cautious outlook,” he said.
(Reporting by April Joyner; Editing by Ira Iosebashvili, Tom Brown and David Gregorio)