By, Abdulah Hussain
Retail investing is on the rise as unorthodox options traders dabble in borderline market manipulation. Individual investors have often been overlooked in their ability to move markets but not anymore thanks to an online Reddit community. This group of over one 900,000 users claim to have found the key to fast wins in the stock market, leaving professionals in awe to question ethical and sustainability concerns.
The notorious online discussion forum on Reddit goes by the name of Wall Street Bets, or WSB for short. WSB’s purpose is to discuss trading tactics on various stocks hoping to trigger a coordinated play for short-term gains. Some have described the culture at WSB as vulgar, greedy, and on numerous occasions even manipulative. This culture is tied to the high-risk, bullish investment strategies that attempt to exploit what they see as a weakness in the system.
Many WSB users believe they have discovered a method to theatrically move stock prices by flooding the market with call options contracts in a unified fashion, leveraging higher volume. Options contracts give the investor the right to buy (call) a stock at a specific price in the future, costing pennies on the dollar to leverage a bet on the market. The rationale behind this strategy is that the brokers who sell these options, known as market makers, are forced to buy shares of the underlying stock to offset the risk exposure that comes with selling options. As share prices increase, market makers continue to hedge risk by increasing their position and thus further perpetuating a bullish rally. The value of options traded increased by 77.0% over the first six weeks of 2020 with most orders being small and high in volume; consistent with retail trading.
WSB’s strategy has been applied to large-cap stocks such as Tesla (TSLA) pouring further gasoline on the red-hot stocks. More interestingly however is the proven potential for this strategy to move small-cap stocks. Smaller cap stocks are highly sensitive to sudden bursts of market attention, as seen by Virgin Galactic Holdings (SPCE), gaining more than 100.0% in less than two weeks of being on the WSB forum. Another WSB favourite is Lumber Liquidators (LL) which saw call volumes rise by 71 times the monthly average and share price surge 18.6% the morning after a Reddit user presented his bull case for the stock the night before.
Multiple concerns have been raised regarding the legality and ethicality of this online investment community. It is acceptable to genuinely discuss speculation on stocks, however, when individuals start injecting false news to move the stock in a certain direction, securities fraud may be on the horizon. This concern has been expressed about Reddit communities both internally and externally, as moderators attempt to monitor the anarchic sea of speculation.
Retail investing’s uptick in the options market seems connected to the Reddit community, WSB, as they shake up markets with their high-risk call options strategies. However, alongside ethical concerns, the sustainability of such an approach is under scrutiny, especially as market sentiment has shifted to bearish territory in response to COVID-19 fears.