As options volume explodes, penny stock trading picks up
With the rise in interest for trading stocks among new investors, one of the concerns is that it's a sign that unsophisticated investors are helping to push markets higher, increasing the likelihood that these gains are only temporary.
While the rise of new accounts is a fact, the implications are far less clear and open for debate. Sentiment among the smallest of traders, especially in the options market, is unprecedented, and that has never been a good sign.
The Equity Put/Call Ratio plunged again on Wednesday, and the 10-day average is now below 0.45 for the first time since the year 2000. If we take a slightly different look than we have in the past, we can see just how much speculative juices are flowing right now, and not just among the smallest of options traders.
Share-equivalent volume in all equity call options on the Chicago Board Options Exchange over the past 50 days is now more than 22% of volume in the S&P 500. That's nearing the record high from February, and the rounded peak formed in 2014 prior to that.
There has been an explosion of new accounts on retail-facing trading platforms, so another place of speculative activity we can check is whether that has translated into a rush into the lowest-priced stocks on the market, those trading over-the-counter, often for less than $1 per share.
According to the latest Nasdaq data, volume in these shares just hit the highest in more than two years.
But when we zoom out, it's barely a blip.
Overall trading turnover rose in June as well. While volume on the Nasdaq relative to the S&P 500 is hitting record highs, when we look specifically at these so-called lottery-ticket stocks, it's still relatively subdued.
Penny stock trading has been an inconsistent indicator over the decades, so we don't put much weight on it. The fact that it's still somewhat subdued might be a very slight positive over the medium- to long-term. It's much more troubling that we're seeing a lot more - even historic - speculative activity in the leveraged, expiring options market.