Why Options Mania Is a Contrarian Indicator By Spencer Jakab

Stock futures point to the possibility of fresh record highs Friday for U.S. benchmarks. Earnings from American Express, Charles Schwab, 3M and SLB are on tap, as is the University of Michigan survey on consumer sentiment and data on housing starts.

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This used to be a day when the stock market turned its gaze elsewhere: the options pits. There's still a reason to pay attention.

Options markets are bigger than ever, but they no longer march to a monthly rhythm. That makes the traditional focus on contract expiration, the third Friday of the month, about as quaint as those tiered floors filled with gesticulating clerks.

Instead, while put and call volume has exploded, it is mostly now processed by computers. And those options are now often bought, and expire, the same day .

Options contracts give investors the right but not the obligation to buy or sell a security like a stock or index at an agreed price. So they're already by their nature volatile.

And individual traders have fallen in love with a particularly racy variety offering lottery-like payoffs-zero-day-to-expiry contracts. Since time is a big component of a contract's price, those that can be exercised in days, or just hours, are a source of cheap thrills.

And big profits for firms processing orders. Exchange Cboe says volume in zero-day contracts on the S&P 500 index has grown nearly sixfold in five years . More than half of that is now made up by individuals.

Last year, broker Robinhood, which played a starring role in meme-stock mania , made four times as much from options trading by its clients as it did from stocks. Its shares are up 336% in the past year.

There are occasional success stories like Roaring Kitty of GameStop fame , but the vast majority of individual option buyers lose. And their billions of dollars don't go to money heaven : They're mostly shared by market makers like Citadel Securities and brokers like Robinhood that route orders to others for rebates.

Instead of using options as part of a larger strategy to protect portfolios from losses, individuals are mostly speculating. In the case of GameStop and the like, reckless buying organized on social media acted like a force-multiplier. Because options market makers need to hedge call contracts, they bought the underlying stock in a virtuous cycle that devastated hedge funds but then boomeranged on unsophisticated buyers.

That isn't something that should worry long-term investors, says Scott Nations, president of options index developer Nations Indexes. The preference for very short-term contracts means there isn't enough time to affect the market much, and fears of a volatility meltdown akin to 2018's " Volmageddon " are also overblown.

But he says options activity can be a contrarian indicator for individual stocks. Index options will generally exhibit something called "put skew," in which downside protection is more expensive. That's because investors pay a little more for insuring against losses than betting on gains. Individual stocks occasionally exhibit the opposite for psychological reasons.

Among the 10 largest stocks in the S&P 500, only one exhibits call skew: Tesla.

If traders' weird affection for a company worth more than every other car maker on the planet combined isn't a sign of froth, the amount of money novices are incinerating in the options market certainly is.

Dividends & Conquer? Your Questions Answered

Many investors love getting those quarterly checks, but should they? Dividends' contribution to overall market returns is a lot less important than it used to be. Some of the best-performing stocks of all time, including Amazon and Berkshire Hathaway, don't even pay one. On the other hand, the long-run return of dividend payers is impressive.

Send me your questions about dividends and stock returns by replying to this email. I'll answer as many of them as I can in a bonus video that will appear in the newsletter in the coming days.

Stocks I'm Watching

Netflix : The streaming service lifted its annual revenue and operating margin forecasts after posting better-than-expected results. However, shares edged lower in premarket trading.

Norfolk Southern : Railroad operator Union Pacific is in talks to acquire its smaller rival . Norfolk Southern's shares rose in offhours trading.

Interactive Brokers : Shares of the online brokerage rose 5% premarket after it reported double-digit trading volume growth for last quarter.

American Express , Charles Schwab , 3M and oilfield services company SLB are due to post earnings Friday morning.

GSK : Shares of the pharmaceutical company fell 6.5% in London after a FDA committee voted against approving Blenrep, its blood-cancer drug .

Burberry : The luxury brand's sales fell less than feared last quarter, sending shares up 4% in London.

BHP : The world's biggest miner posted record annual iron ore and copper production . Shares gained 3% in Australia.

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About Me

I've been musing about finance for more than 30 years, including editing The Wall Street Journal's Heard on the Street column for a decade, writing two investing books and running a team of stock analysts at a global investment bank.

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July 18, 2025 06:59 ET (10:59 GMT)

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