How S&P 500 options action may help explain the rising volatility in memory stocks

By Jamie Chisholm

Bullish derivatives bets mesh with the buy-the-dip mentality, says IBKR's Sosnick

How options trading is at the root of volatility in memory-chip stocks.

The U.S. stock market sits just shy of record highs after another slide - on renewed valuation concerns about AI companies - triggered an even faster rally, as chips and hyperscaler plays bounced.

Steve Sosnick, chief strategist at Interactive Brokers, seems wary of such knee-jerk rebounds, and argues that a shift in attitudes toward option trading may help explain them.

In commentary published Thursday afternoon, Sosnick takes note of the vigorous action in memory-chip stocks in recent days. Recall that these stocks were at the center of the market's volatility over the past few weeks as they got caught in the blow-up of the hedge fund Situational Awareness.

Shares of Sandisk (SNDK) and Western Digital (WDC) opened with double-digit percentage losses on Thursday after succumbing to a currently prevalent market trend: earnings and revenues that beat consensus estimates but guidance that appeared to underwhelm the more enthusiastic investors.

But for Sosnick, "the bigger story is the intraday rallies that occurred in these stocks after significant initial shakeouts." He notes that Western Digital was down 21.5% at one point but cut that loss to about 8.5%, while Sandisk fell 13.8% and at one point cut its loss to about 3%. (Both did fall back a bit more later in the day.)

A look at the longer-term charts of Western Digital and Sandisk shows that, despite being well off their peaks, both stocks have had stellar returns even with volatility a constant factor. And even as both fell from their June highs, there were significant rallies during the downtrend.

Such moves, says Sosnick, show that dip buying "remains a key source of activity, even if it results only in countertrend moves. To my mind, this is reflective of the overall approach to risk that has pervaded the general market mindset."

And that risk-seeking attitude is exemplified by the action in major index options, he believes.

Sosnick quotes a post on LinkedIn by Henry Schwartz in which the vice president of market intelligence at Cboe examines trading in S&P 500 options. Such options give the buyer the right to purchase the index at a particular level within a specific time frame (a call option) or the sell the index under the same criteria (a put option).

Schwartz notes that as option-trading volume has exploded in recent years, there has been a sharp decline in the ratio of puts to calls, which "illustrates a dramatic change in user behavior compared to prior decades." In other words, options traders are becoming more bullish.

Indeed, Schwartz notes that earlier this week a record 4 million S&P 500 call options were traded, with a put-call ratio of 0.83, which, he says, is the second-lowest reading ever.

Sosnick says he is wary of placing too much emphasis on one statistic but nevertheless argues that a near-record-low put-call ratio is worthy of consideration as it shows "it is indisputable that bullishness is quite well-ingrained in the market's mindset."

"This is reflected in the ever-shorter and ever-shallower dips in key indexes, and by the relatively violent reactions when good news justifies an upward revaluation," he adds.

Often, a low put-call ratio is a sign that investors are overly ebullient and can thus be seen as a contrarian indicator, presaging a market retreat. Sosnick is cautious about using the statistic to call a market top or turning point.

But, he says, "I do think it's fair to note that we have seemingly changed our general perceptions about whether major index options are better utilized as tools for speculation rather than risk management."

"It is, of course, possible that this change does involve risk management, but the risks being managed are those of underperformance rather than concerns about losses," he adds.

The markets

U.S. stock-indices SPX DJIA COMP are higher at the opening bell on Wall Street as Treasury yields BX:TMUBMUSD10Y dip in response to weak jobs data. The dollar index DXY is little changed, as oil futures (CL.1) slip and gold futures (GC00) trade around $4,409 an ounce.

 
Key asset performance                                                Last       5d       1m     YTD     1y 
S&P 500                                                              7709.96    3.66%    2.20%  12.63%  21.61% 
Nasdaq Composite                                                     26,348.35  4.88%    0.54%  13.37%  24.03% 
10-year Treasury                                                     4.667      -7.30    10.50  49.50   38.10 
Gold                                                                 4368.1     6.58%    5.79%  0.83%   26.31% 
Oil                                                                  77.25      -11.00%  8.03%  34.56%  21.94% 
Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

U.S. nonfarm payrolls fell by 23,000 in July, diving from a downwardly revised positive 20,000 in June, and way below economists' forecasts of an 83,000 increase. The unemployment rate dipped to 4.1% in July from 4.2% the month before.

Meta (META) has been ordered to pay nearly $1 billion to address harm to kids caused by social media.

Trade Desk shares (TTD) are diving after the digital advertising company delivered an earnings and revenue miss combined with disappointing guidance.

Wendy's shares (WEN) are lower after the fast-food group pulled its full-year outlook and cut its annual dividend, citing declining customer traffic.

Under Armour stock (UAA) is dipping after the athletic-wear group posted a small profit but revenue declined.

Other U.S. economic data due Friday include a consumer-credit update for June, published at 3 p.m.

The Richmond Fed president, Tom Barkin, takes part in a fireside chat at 10 a.m.

The last time value stocks beat growth by this much was 2022 - the year of the last major bear market.

The chart

The latest survey from the American Association of Individual Investors covered the week through late Wednesday, during which the S&P 500 rallied to record highs. And yet, for the third week in a row, the proportion of bears was greater than that of bulls.

Top tickers

Here were the most active stock-market ticker symbols on MarketWatch as of 6 a.m. Eastern.

 
Ticker  Security name 
SPCX    SpaceX 
NVDA    Nvidia 
TSLA    Tesla 
MU      Micron Technology 
AMD     Advanced Micro Devices 
AAPL    Apple 
MSFT    Microsoft 
TSM     Taiwan Semiconductor Manufacturing 
SNDK    Sandisk 
PLTR    Palantir Technologies 

Cool capybaras crash the vote.

-Jamie Chisholm

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08-07-26 0930ET