Friday’s options market set a new record—and you probably missed it.

Open interest (the number of open option contracts) for June expiration started the day at 381,360,325, beating the prior record of 380,000,000 set in 2011.

That’s incredible given that we’re near record highs…but it’s only half the story.

Year-to-date, the average daily option volume stands at 27.7M, which is 45% above the 2019 average, and 37% above the annual record set in 2018.

What’s driving all this extraordinary volume and why does it present a problem for equities?

That’s what we’re here to discuss in this week’s jump.

Plus, there’s one day this week with two events that could mark the next turning point, as well as a look at the upcoming campaign season.

So, grab a cup of joe and put on your jammy jams as we open up this week with one of my favorite topics – Options.

 

Record options isn’t always a good thing

 

It wasn’t that long ago that options were something only floor traders or degenerates poked around in.

 

Kind of like this guy…

 

Fast forward several decades and anyone with a few hundred bucks and a Robinhood account thinks they belong on CNBC.

Even without the crash in March, interest in options trading has steadily grown.

Yet, most traders haven’t bothered to even learn the basics, let alone attend a webinar. 

Would you want a doctor to perform open heart surgery without first being supervised?

I know I sure wouldn’t.

Growth in the options market points to a fault line in this recent rally because of HOW options are used.

Since the decline in March, investors haven’t been interested in permanent holdings. But, they don’t want to miss out on the upside.

Like myself, many of them see the current rally as Fed induced. So, instead of committing long-term capital, they’re buying call options. 

For every call option bought, someone sold it to them. Typically, that’s a market maker. To hedge their positions, they go out and buy the corresponding stock. 

Do that enough, and you can get a rally built on nothing more than Fed juice and hedging.

And that’s what worries me most about this rally.

The run in price isn’t built from a solid economy. It reminds me more of what lead into the dotcom bubble and The Great Recession.

We know how both of those turned out…

 

Economic data is about to get much worse

 

Speaking of the economic data, economists keep getting it wrong in terms of the personal consumption and spending these last couple of months.

But that’s about to make a hard u-turn.

Buoyed by government stimulus, much of the American economy held together by a bandaid that we’re about to rip right off.

Moratoriums on foreclosures and evictions are about to come to a close. Direct payments to taxpayers aren’t likely to be repeated.

In effect, we’re on our own.

Looking at the broader economic activity, that doesn’t look like much.

With several Fed activity data points this week, we’ll find out how much of the economy has started to return.

Chances are we’re about to plateau from our rebound off the bottom. There’s no further stimulus or loans left to prop us up, nor is everything returning to normal that quickly.

In fact, that’s one of the biggest challenges we face that I see as the primary risk to equities.

 

Coronavirus part deux

 

You wouldn’t expect community health to be a partisan issue. Yet, there’s a clear political divide on the matter as states and municipalities reopen.

There isn’t one governor out there that doesn’t want to open back up for business ASAP. However, many disagree on how fast to loosen restrictions.

States like Florida and Texas saw spikes in positive cases coinciding with reopening. We were told this was due to more tests conducted, which made sense.

Now, the percentage of positive tests as well as hospitalizations are on the rise, worrying both sides of the aisle.

Without a vaccine or clear treatment, the greatest danger the pandemic presents is overloading the healthcare system.

That’s why these trends are so worrisome. 

Even if governors reopen states, we could see municipalities halt and even retrench loosening restrictions.

With a market pricing in perfection, that’s definitely not something investors anticipated.

 

What I’m watching this week

 

Beyond keeping an eye on the hospitalization news, I’m curious how quickly President Trump and other politicians race to campaign.

So far, we haven’t seen reports of significant increases in infections due to the protests, though that could quickly change. Campaign stops should present similar risks (though not equivalent).

Rhetoric may actually matter this time around. Unless politicians find common ground, the stimulus will fade and economic activity will grind to a halt.

If elected officials find it more difficult to agree than to demonize one another, this will become a reality.

And not to be left out, we’ve got not one but two Fed members speaking on Wednesday. 

At this point, anything the Fed says tends to not be well received by the market.

So, watch closely as this could mark a great trading opportunity.

To get yourself ready, do yourself a favor and attend my Options Masterclass.

This 5-part online class delivers trading techniques I cultivated over the last 20 years – the same ones I used to earn millions in the stock market.

Click here to learn more about my Options Trading Masterclass.

Stocks I want to bet against…

 

TTD, CAT, BA, TDOC, SC, DFS, PENN, SHOP

 

Stocks I want to buy…

 

MJ, DKNG, FSLY, PYPL, CHGG, OKTA, ZM, CHWY, TWLO, MTCH, NOW, CVNA, DDOG, WYNN, SIX, ABT, SPCE, GAN, SPOT, REGN, KWEB, VAPO, AVLR, PINS, ECL, CARR, TW, GMBL, GDX, EXPE, RNG, MKTX

 

This Week’s Calendar

 

Monday, June 22nd

• 8:30 AM EST – Chicago Fed Activity Index for May
• 10:00 AM EST – Existing Home Sales for May
• Major earnings:  Invesco Mtge Cap Inc (IVR), W&T Offshore Inc (WTI)

 

Tuesday, June 23rd

• 7:45 AM EST – ICSC Weekly Retail Sales
• 9:45 AM EST – Markit Manufacturing & Services PMI for June
• 10:00 AM EST – New Home Sales for May
• 10:00 AM EST – Richmond Fed Manufacturing Index June
• 4:30 PM EST – API Weekly Inventory Data
• Major earnings: None of note

 

Wednesday, June 24th

• 7:00 AM EST – MBA Mortgage Applications Data
• 9:00 AM EST – FHFA Housing Price Index April
• 10:30 AM EST – Weekly DOE Inventory Data
• 12:30 PM EST – Fed Member Evans speaks
• 3:00 PM EST – Fed Member Bullard Speaks
• Major earnings: Patterson Companies (PDCO), Winnebago Indus (WGO), KB Home (KBH)

 

Thursday, June 25th

• 8:30 AM EST – Weekly Jobless & Continuing Claims
• 8:30 AM EST – GDP, Personal Consumption, & Core Price Q1
• 8:30 AM EST – Advance Goods Trade Balance, Wholesale Inventories, & Durable Goods Orders for May
• 10:30 AM EST – EIA Natural Gas Inventory Data
• 11:00 AM EST – Kansas City Fed Manufacturing Activity for June
• Major earnings: Darden Restaurants Inc (DRI), Mccormick & Co (MKC), Rite Aid (RAD), Aethlon Medical Inc (AEMD), Nike Inc Cl B (NKE)

 

Friday, June 26th

• 8:30 AM EST – Personal Income & Spending for May
• 8:30 AM EST – Personal Consumptions & Expenditures Deflator for May
• 10:00 AM EST – University of Michigan Sentiment June
• 1:00 PM EST – Baker Hughes Rig Count
• Major earnings: None of note