September Technology Calls Expire Worthless for Robinhood Traders

The last few months have been terribly exciting for the technology sector. It is the most loved and the most hated at the same time.

Long-term players want to be long the sector but cannot justify adding to stocks when they are at nosebleed levels and are too scared to average in higher. Short-term players always try to short the sector, trying to call a top, but they risk getting burned as the momentum is just too strong and wipes them out. Because of the massive weighting of these stocks in the large-cap indices, what happens to them has huge bearing on what happens to the rest of the sectors and industries, and vice versa.

Back in August, the S&P 500 moved 8% higher on light volume and no new news about the economy or the recovery. It was a handful of stocks dragging the index higher, among them Amazon (AMZN) , Apple (AAPL)  and Tesla (TSLA) , with Apple and Tesla doing so into stock splits, which are financially neutral events. The logic that splits would make these stocks more appealing to smaller investors because of their smaller ticket sizes would mean they should outperform after the split. Instead, they collapsed right after their stock splits. It was just pure momentum.

More than that, we saw how Softbank and Robinhood and perhaps tons of hedge funds that chased the upside call gamma play distorted the market and its behavior massively. Because stocks never go down, investors hoped to lever their capital 10 to 100 times by owning the underlying stocks via upside call options. The thing most do not realize is the theta angle of derivatives. In layman’s terms, when one buys upside calls even if the stock moves to strike the call is worthless into expiration, as for that call to be in the money the stock needs to move in multiples of what it usually can do in order to make money on the call. The sooner it happens, the more time value it has, but the closer to expiration it happens, the call decays faster than you can see on your screen. That is the beauty of options, or owning theta as we say.

September expiration has come and gone and all those calls for which investors paid so much premium have now disappeared, leaving them with no upside in the underlying names. Given the exaggerated state of some of these quality stocks, this is why we saw sector rotation, selling out of the winners (growth) and buying back some of the laggards (value). As portfolios locked in their year-to-date gains plus dealers sold stock to hedge their short gamma exposure, it caused a massive reversal in the Nasdaq after breaking its 21-day, then 50-day, and now testing its 100-day moving average.

The weak longs have been flushed out as they bought much higher as were told to obey the 21-day rule. The charts look a lot cleaner now. But the bigger question is whether the Nasdaq can recover its 50-day moving average and trend back higher. The pain trade will be if it just shoots higher from here without looking back as traders will be left with a sense of fear of missing out.

The sector saw sizable outflows last week, and now some worry whether this is a repeat of 1999 or a post-2000 outcome. The jury is out as the market looks precarious. The charts will not tell you whether it is a buy or a sale; they can only tell you what the sensitive points are to see when the buying and selling can come in.

Never underestimate the power of derivative exposure and expiration. The gamma in the technology space has normalized as a lot of it expired last week. The space is a lot cleaner, for now. The only question you need to ask yourself is whether you still believe in the fundamental story. Surely if you did when it was up 30% from here, you would down here, too, no? Such is human psychology. The shrieks of “we’ll buy 5% down from here” when stocks are making new highs suddenly vanish when stocks actually fall.

Investors are salivating at the growth versus value trade given its decade-long divergence and desperately try to buy financials and energy, only to see them come right back down as fundamentals do not support them. It is important to remember why they are bouncing, technical sector rotation or pure genuine recovery. Until we get a proper economic recovery or another dash of much-needed fiscal stimulus, the value names will not be able to break out. Such is the state of the market, that even a $3 trillion surge from central banks is not enough to garner a full economic recovery.

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