Wall Street Opens Mostly Lower as Profit-Taking Hits Tech; Dow up 18 Pts

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Investing.com — U.S. stock markets opened mostly lower on Thursday as the aggressive buying of options in tech stocks by retail traders over recent weeks continued to unwind. 

By 9:40 AM (1340 GMT), the Nasdaq Composite, which has marched from one record high to another in recent weeks, was down 1.8%, while the S&P 500, which also hit closed at a new record high on Wednesday, fell 0.7%. The Dow Jones Industrial Average, which has less exposure to tech than the other two big boards, rose 32 points, or 0.1%, to 29,133 points.

The losses were led by some of the names that have made the biggest gains in recent weeks. Tesla (NASDAQ:TSLA) stock fell 6.6% while Apple (NASDAQ:AAPL) stock fell 2.9%. While Tesla was still arguably dealing with the overhang of stock placed earlier in the week by U.K.-based Baillie Gifford, one of its biggest institutional investors, there was no obvious news flow behind Apple’s movement. 

Analysts at Saxo Bank noted that the extraordinary moves of some hot tech stocks in recent weeks had been caused by brokers buying the stock to hedge exposures taken by selling call options to retail traders well above current market levels (so-called ‘out of the money’ calls). 

“These options dynamics are causing massive intraday volatility in certain stocks, so we recommend traders and investors to prepare for large sudden intraday moves,” Saxo wrote in a note to clients Thursday. “Tesla Sep 18 call options with strike at $450 (just above yesterday’s close) are trading at implied volatility of 120% indicating the huge uncertainty in Tesla’s share price. This means that investors buying call options really need big moves to the upside to get the calls in the money. At some point many investors buying these calls will learn it the hard way that these implied volatility levels are extremely elevated and expensive.”

For now, though, the army of retail traders that has driven much of this year’s rally seem undaunted. Open interest in the futures contract mentioned by Saxo actually increased on Wednesday, meaning that traders actually increased their exposure on Wednesday.