over 3 years ago • 2 mins
Four times a year, lots of major derivative contracts on US stocks expire all at once. That leaves investors with a decision to make: “roll” the contracts forward by buying those with a later expiry date, or buy and keep the related shares.
But what made Friday’s event notable was last month’s frantic buying of short-term tech stock options. See, a short-term “call” option gives you the right to buy stocks for a pre-agreed higher price at some point in the near future. And when someone buys one of them, the trader who takes the other side of the bet buys those companies’ stocks at their current price so it’s ready to hand them over 🤲 That pushes their share prices higher, which in turn drives an increase in option and stock valuations. But if that bubble bursts – like it did earlier this month – the owners of those options will let them expire. And that means the traders will sell the shares they don’t need any more, putting downward pressure on stock markets.
Most institutional investors were aware of Friday’s phenomenon, but retail investors might not have been 👀 And while they haven’t historically had much of an impact on stock markets, the recent popularity of commission-free trading means retail traders now account for 20% of stock trading versus 15% last year. Their trades, then, have had a bigger effect on stock markets than most people could’ve anticipated.
Investors are better off thinking long term, and should ideally only check on their investments to rebalance them ⚖️ Prices tend to rise over time, after all – and research has shown that the disappointment you feel from seeing your portfolio’s fallen outweighs the kick you get from seeing it rise.
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