What to expect from meme stocks in 2021

Amy Wu Silverman, RBC Capital Markets equity derivatives strategist, joins Yahoo Finance to discuss what is happening in the options market, outlook on the SPAC market, and the biggest risks for markets amid the pandemic.

Video Transcript

MYLES UDLAND: Let's stay on the markets and talk a bit about what we have seen in the options market and what we may see in the options market as we roll into the month of March coming up in just a week. Amy Wu Silverman is the head of derivatives strategy over at RBC Capital Markets. Amy, it's great to talk with you once again.

I'd love to start with what is happening in options right now because there was such-- it was the center of all that GameStop, kind of, drama, and things were so out of whack with pricing and availability. And when you look at the options board today, what are you seeing implied in that pricing?

AMY WU SILVERMAN: Yeah, I mean, I guess compared to GameStop and what we saw there, like, nothing's as exciting. But, you know, we continue to see a pretty large dichotomy. So within the options market, there still continues to be that momentum-driven fervor. To give you an example, we see a lot of upside buying in the SPACs.

So large traded call spreads, call options, all positioning for very short-term upside in the SPAC market across a number of different underliers. But at the same time on the index level, when you look at NASDAQ and Russell and S&P, you're also seeing a lot of hedges going through. And I think that's partly a function of there's really two distinct cohorts now, the institutional one and the retail one.

And they're a little bit kind of off doing different things. But it's very clear that there appears to be more concern on the institutional side than you do see on the retail side.

JULIE HYMAN: And one of the things that actually surprised me on that front from last week's GameStop hearing was Vlad Tenev, the Robinhood CEO, I think saying only, what was it, 3% of the folks on the platform are trading options, if I have that right. Or was that the-- am I mixing it up with the 13%? It was a minority of investors, a small proportion of the investors on there were trading options.

And so when you talk about the interplay between retail and institutions, it still sounds like institutions are accounting for the vast majority of volume that we're seeing in options. And so if that's true, what does that tell you in terms of the balance and in terms of how that tail might be wagging the dog, so to speak?

AMY WU SILVERMAN: Yeah, it's a good point. And I think there's two things on that testimony. The first is we have seen just substantial call option buying. And the question being, like, how do we know that's retail versus it being institutional? You really see it in the lot size. So, you know, the size of, call it, 10 option lots and under has exploded. That's not institutional size.

Buying, now, it's not necessarily all on the Robinhood platform. It could be across a variety of different brokerages. But that's definitely there. But that is definitely not to say that, frankly, institutional investors then follow along when they saw that momentum continuing. And ultimately, that really impacted the volatility surfaces a lot of these single stocks like GameStop.

But beyond that, what I have found to be interesting is generally retail tends, at least until now, to only be buying calls. We haven't seen them do that much hedging. But we see that more from the institutional space, where that's always been part of a long-short portfolio program to have that insurance in place.

Now, one wrinkle to that that I would say is you're starting to see on these Wall Street chat boards people pitching UVXY. So essentially being long volatility via these VIX-related ETFs. You know, that's interesting to me because it would tell you that they're also thinking about that tail protection as well. It's not just sort of a credit-based hedge fund or institutional community who's concerned about that tail risk.

BRIAN SOZZI: Amy, with the return of volatility in the markets about the past week continuing right now today to kick off this week, has that changed any of your strategies? What strategies are you putting in place?

AMY WU SILVERMAN: Yeah, you know, it's a good question that's interesting because one kind of stat I would give you is that, obviously, volatility is a lot lower than it was in March and April of last year because we obviously had kind of the steepest decline in recovery on record. I think VIX hit 88 or some record number.

And so it appears that volatility is lower now. But we're still probably, I would say, 6 to 7 volatility points above the pre-pandemic level. And that hasn't gone down. So essentially, the VIX call wings are very expensive, term structure is very, very steep, essentially telling you that future option prices are risky. So, you know, a couple different structures work for that.

One is any sort of program that's selling that hallway. So essentially, the thesis there is, look, obviously the market has run up a lot. I'm willing, at this point, to sell an expensive call wing, still retaining upside, but sort of saying, I'm willing to give up upside beyond another 10% to 15% and using that to fund hedges.

Because the reality is buying hedges is still pricey. And you need some offsetting factor to make that more palatable if you want to own a hedge.

JULIE HYMAN: Amy, finally, I want to ask you about cryptocurrency and what you're seeing. Obviously, there are a limited number of ways in the options market, in the derivatives market that one can play crypto. But what are you seeing? Or I mean, are we seeing activity in some of the Bitcoin proxies like a Tesla or MicroStrategy or the futures market, et cetera? And what directionally is it telling us, if anything?

AMY WU SILVERMAN: Yeah, so unfortunately, I'm a little limited right now in what I can comment on Bitcoin directly. But what I would tell you is that there are obviously options on Bitcoin itself. It's not as vast and liquid as the primary listed options market. But it is there for people to use.

But beyond that, you know, it's just, I think, more of a function in general of the larger play that we have seen on momentum and disruptive technologies. You know, to give you an example, I can discuss, like, the ARKK ETF, which thematically is about disruptive technologies. We've seen a lot of options action on that, we've seen a lot of options action on SPACs, we've seen a lot of options action on Tesla itself.

The one joke I make on Tesla is we have 2,000 stocks that we look at volatility surfaces for, and we keep Tesla in its own little bucket because it's volatility surface has always been inverted. The call wing has always been higher than the put wing. That's not really true consistently for any other stock other than Tesla. We'll have to continue to make those kind of accommodations in the future because it kind of looks like it's here to stay.

MYLES UDLAND: All right, really interesting conversation there, a look inside what's happening in the options market, something I'm not sure that too many folks that look at equities think all that much about. Amy Wu Silverman is the head of derivatives strategy over at RBC Capital Markets. Amy, great to get your thoughts. Thanks for joining, as always. I know we'll talk soon.