Retail Investor Mania Fizzles In Unforgiving 2022

Remember the retail investor mania?

For a few months in early 2021, Reddit residents and gamers-turned Robinhood addicts pretended they’d usurped Wall Street and conquered the buy-side. The meme stock frenzy is remembered primarily for GameStop’s historic squeeze, but it should be viewed in the wider context of a sudden realization among scores of newly-minted day-traders that it was possible to bend reality through collective action.

GameStop garnered the headlines, but the more remarkable (and durable) phenomenon involved the weaponization of gamma by motley collectives, upon whom it dawned that together, they had the power to create self-fulfilling prophecies in single-names by leveraging options dynamics. That, in part, explained the summer 2020 tech melt-up and was also responsible for episodic rallies in Tesla, among other names.

In the aftermath of the GameStop circus, analysts suggested it was just a matter of time before the wave of speculative retail participation receded. And it did. Recede, I mean. Only not entirely. Day-traders continued to engineer gamma squeezes in popular tech names and every few weeks or so, familiar meme stocks found their way back above the proverbial fold.

But with global equities in, or very close to, a bear market, and developed market central banks intent on wringing out any remaining remnants of speculative froth, the game has… well, stopped.

“Speculative positioning in volatile stocks has been reduced by half in recent months,” Goldman’s John Marshall said, noting that on the bank’s estimates, retail traders have sold 52% of the $27 billion in Nasdaq 100 positions they accumulated since January of 2019. The number is lower for S&P 500 stocks (figure on the left, below).

More germane for the options discussion, retail use of calls has plummeted from the peaks hit in November, when Tesla was rising at a cartoonish rate, as options activity turbocharged a fundamental catalyst (the Hertz order). From October 15 to November 5, Tesla vol leapt from 35 to 64, while the stock rose nearly 50%.

“We believe it is critical to monitor options volumes to understand retail investor risk appetite through time,” Goldman’s Marshall went on to write, noting that since the pandemic, options volumes have increased sharply.

Indeed, “the daily notional volume in the single stock options market has often exceeded the daily volume in the single stock shares market,” he remarked, on the way to describing the decline illustrated in the figure on the right (above). “Over the past seven months, single stock call option volumes have reversed 70% of their increase from January 2019 to their peak in November,” Goldman said, calling that drop a sign that risk-taking among retail traders in the options market has “normalized.”

The same analysis showed retail investors have likely been sellers of S&P 500 stocks since early February.

Last week, in one of several articles documenting the closure of Gabe Plotkin’s Melvin Capital (the highest profile casualty of the Reddit wars), Bloomberg’s Claire Ballentine and Misyrlena Egkolfopoulou spoke to a number of small-time investors about the episode.

“I have long positions in some of the meme stocks so I hope we see the covering from the closing of these funds,” one 27-year-old from Atlanta said, telling Ballentine he made “about $20,000” trading GameStop in early 2021.