In many ways, Tesla epitomizes today’s market, in which retail and institutional investors have chased promising, high-growth companies. The automaker has become synonymous with the business momentum of 2020 – stacking stocks that have climbed the fastest and the furthest. Few stocks can match the speed with which Tesla has soared.
Data from Socit Gnrale SA from June shows that individual investors tend to prefer stocks that have risen the most in the past three months. Traders who use Robinhood Markets Inc. brokerage have significantly increased their holdings in these stocks since March, outperforming investments in the worst-performing companies. Investors have also piled up in exchange-traded funds to keep up with the momentum of the exchanges.
And like the larger market, Tesla has been painfully hard to bet. Few saw its dramatic rise coming, and the rise continues to alarm and burn many investors who sought to profit from its demise.
Technical momentum helps explain the stock’s jaw-dropping gains, as bearish bets on the company inadvertently fueled Tesla’s rise and derivatives bets tied to its lead helped intensify the rally.
Many investors don’t just buy small dips in the stock market or individual stocks like Tesla. They look for turbocharged trades that profit when individual stocks rise rapidly and, sometimes, borrow money to bet big.
Stock option volumes have hit an all-time high this year, and trades that pay off if stocks continue to soar have been popular in recent months. These derivatives, called buy and sell contracts, allow investors to deposit a small amount of money for potentially quick and outrageous returns if their bets turn out to be correct. Although they can increase profits, they are extremely risky.
These trades are increasingly influencing the stock market itself. Bets on gigantic options from big investor SoftBank Group Corp. have helped boost recent market roller coasters, as well as individual investor transactions.
Barclays research shows that stocks with the biggest increase in options trading over the past year have outperformed the market this year. In addition to Tesla, these stocks include Amazon.com, Apple, Microsoft, Shopify Inc., among others.
“You get more real pressure than you normally would,” said Cem Karsan, senior managing partner at hedge fund Aegea Capital Management LLC. He says he bet against some tech stocks this year and bought options that would profit if the tech sector skyrocketed until the end of the year. “These things always go further than you can imagine.”
Write to Gunjan Banerji at [email protected]
(END) Dow Jones News Wire
September 15, 2020 11:26 ET (15:26 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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