How Tech Options Started Juicing the Stock Market

The precipitous rise of U.S. technology stocks in 2020 left even seasoned veterans on Wall Street struggling for explanations. Sure, many of the companies were among the select few that had prospered during the pandemic, as online shopping and working from home proliferated. But the stock gains were so stratospheric -- Apple Inc. shares doubled in five months -- that some market watchers began to speculate that a traditional hedging trade might be fanning the flames. Options trading -- so the theory goes -- had evolved from a way for investors to protect against losses to a key driver of market frenzy.

The options market in the U.S. has exploded this year. Trading volumes of single-stock options exceeded those of regular shares for the first time during July, according to Goldman Sachs Group Inc. strategists. Options became hugely popular with retail investors seeking to ride the technology share rally. That’s had some peculiar effects on markets, such as reversing the usual relationship between options and stock prices, which typically move in opposite directions but have been rising together. An unusually volatile Nasdaq 100 Index -- it fell 4.9% or more in three straight trading sessions in early September -- also hinted at the outsize influence of options.