It has been a very different kind of year for the stock market and this week has been no different...as the week before Labor Day weekend has not been the normal boring week we usually see in the market place. For the first three days of the week, the market rallied nicely (+2%)...but it gave back much more than that yesterday with a 3.5% decline in the S&P (and -5.2% for the Nasdaq).
The seeds for the decline were sown on Wednesday...when a small number of tech names like TSLA, ZM and APPL got hit hard. When they were unable to bounce-back in the morning yesterday (like they have on other big down-days over the past few months)...and when other mega-cap tech names (including several key chip stocks) rolled-over along with them...the rest of the market fell out of bed.
The situation that we’ve been highlighting in the options market in recent weeks...and the one that has received a lot more attention this week (with the impact of “negative gamma”) played a big role in once again yesterday (but in the opposite direction this time).
To quickly review...there has been an explosion in the buying of call options in the marketplace recently. This has taken place is some of the biggest index ETFs...as well as many of these individual mega-cap tech names. (The fact that many of these stocks/ETFs now have weekly options have made it cheaper for people to play in that market.) When investors buy these options, the brokers (or “dealers”) are usually the main seller. However, their job is to collect the fees involved in these transactions, NOT to take the other side of the trade. Therefore, once they sell those call options, they turn around immediately and buy the underlying stock or ETF (at whatever the ...