Recent Market Movements

My investment banker sent out a general email to his clients on the recent goings-on with the markets.

In case you were wondering, here's what he says about it:

In speaking with clients recently, I have found that there is concern and, at the same time, interest in what we are hearing in the financial press with regards to options strategies and trading strategies on short squeezes.  I hope to provide some insight as to what is occurring, which is indeed highly unusual.

There has been very large volume of late in options’ contracts on US options exchanges.  The volumes that are beyond the normal have been attributed to small-dollar retail activity in large numbers in aggregate.  The small investors have been caught up in the momentum of price rises in US equities and are leveraging via call options.  They are buying call options in price momentum names.  This is a very short-term strategy, is not very tax efficient, and is likely to end abruptly as price momentum tops out and price speculation ends with total losses of the call premiums paid by the speculator.

The other phenomenon we are witnessing is that of coordinated attacks on the stocks of companies that are heavily shorted by hedge funds and long/short strategies.  Retail and internet forums that communicate short positions have banded together to run up the stock price and force those with short positions to buy the stock back and run the price ever higher.  Several stocks have had a tremendous run up over the last few weeks, completely manipulated by this strategy.  Oversight authorities are reviewing this practice and I expect there to be modifications to practices and new rules to dampen the extraordinary speculation we’ve been seeing recently.  As ever, as long as there are ways to make money, creative minds will find a way, even if it doesn’t fit into a prudent investment approach.