Bruised tech investors are hedging their bets

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By Nicole Goodkind • Tuesday, January 10

Good morning. Here's what's in today's newsletter: The tech stock crash has led to an explosion of options trading on Wall Street. Plus, layoffs continue as more recession signals loom.

US stock futures are sliding lower. Markets in Europe are also weaker but Asian indexes closed generally higher as the region entered a bull market thanks to bets on China's rebound.

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What's happening now in markets:

▼ Dow Futures 33,527.00 (-0.42%)

▼ S&P 500 Futures 3,897.00 (-0.43%)

▼ NASDAQ Futures 11,118.00 (-0.60%)

▲ 10 Year Treasury 3.565%

▼ Gold $1,876.50 (-0.07%)

▲ WTI Crude Oil $74.97 (+0.46%)

▲ Bitcoin $17,220.00 (+0.20%)

MARKET DATA AS OF 8:09 AM ET

MARKET WATCH

Bruised tech investors are hedging their bets

There are two certainties in today's market: The tech sector has been beaten down and interest rates are higher.

And while analysts widely anticipate an easing in the Fed's rate hikes this year, institutional investors are increasingly using a dangerous tactic to take advantage of market falls. That shift could be leading to an increase in misleading data about investor sentiment.

What's happening: Investors are purchasing put options, the bearish bet that a stock will fall during a set period of time, on certain tech stocks, at historic rates.

Apple and Amazon each lost more than $830 billion in market cap in 2022, and other big tech stocks like Meta and Nvidia lost about 75% and 57% of their value over the 12-month period. Those huge upsets were bigger than even the most pessimistic market analysts had forecast.

The losses also created a booming market for investors who hold put option contracts that allow investors to sell shares of these stocks at a price higher than their current levels.

Shares of Zoom, for example, closed at $70 on Monday, but put options contracts that are set to expire in just a few days can be exercised for $77 per share. Nvidia, which ended Monday at $156 has an option set to expire this week that can be exercised for $170, according to Nasdaq data.

Investors typically purchase put options as an insurance policy. They give traders the ability to sell shares at a certain locked-in price by a certain date. Now, investors who have these options are selling their contracts for a premium and then reinvesting the money.

The number of traded US contracts surged past the 10-billion mark in 2022 for the first time ever, more than doubling from the level three years ago.

The options surge makes sense in a year when the S&P 500 shed 20%. Trading in puts grew by more than 30% compared to 2021. Bullish call contracts meanwhile — which allow investors to purchase stock at locked-in price — fell by 12%.

Analysts at SpotGamma say the trend is likely to continue, spurred on by Wall Street firms who see this as an "arbitrage" trade and not by retail investors looking to protect their investments.

"The sharp decline of many single stocks over the past year has driven many 'put' positions deep in the money," they wrote.

Big changes: Professional traders and algorithmic-powered institutions are getting involved in these trades, according to Bloomberg data, especially around economic data releases or Federal Reserve policy decisions: Trading of such contracts more than doubled to nearly 11% of daily average stock-options volume in the fourth quarter, up from an average around 5%, according to a report by the Wall Street Journal. These quick options trades are increasingly contributing to overall market volatility, say analysts.

The increase in financial options arbitrage could also be leading to false conclusions around investor sentiment, as the ratio of put options (which are bearish) to call options (bullish) changes on the Chicago Board Options Exchange.

This ratio is generally seen as a way to measure how "fearful" or "greedy" investors are. CNN Business's own Fear and Greed Index includes an analysis of the put and call ratio (amongst nine factors). The ratio recently rose as high as 2.4, after passing 1.5 for the first time ever last month, according to Dow Jones Data.

VOICES

7,000 'exhausted and burnt out' NYC nurses walk out

"We've been fighting for working under safer conditions. We do the best we can every day. There's something wrong inside the hospital. That's why we're outside the hospital."

WARREN URQUHART, TRANSPLANT NURSE ON STRIKE, MOUNT SINAI HOSPITAL

Read more from CNN.

ECONOMY FLASH

Silicon Valley layoffs go from bad to worse

Tech is getting hammered, and those losses in earnings and share prices are beginning to make their way to payrolls.

This year is just getting underway but it's already shaping up to be a year when people at those tech companies brace for how much worse things can get, reports my colleague Catherine Thorbecke.

Amazon has announced that it is cutting more than 18,000 jobs, nearly double the 10,000 that had previously been reported and marking the highest absolute number of layoffs of any tech company in the recent downturn.

On the same day Amazon announced layoffs, Salesforce said it was axing about 10% of its staff — a figure that easily amounts to thousands of workers — and video-sharing outlet Vimeo said it was cutting 11% of its workforce. The following day, digital fashion platform Stitch Fix said it planned to cut 20% of its salaried staff, after having cut 15% of its salaried staff last year.

The continued fallout in the industry comes as tech firms grapple with a seemingly perfect storm of factors. After initially seeing a boom in demand for digital services amid the onset of the pandemic, many companies aggressively hired. Then came a whiplash in demand as Covid-19 restrictions receded and people returned to their offline lives. Rising interest rates also dried up the easy money tech companies relied on to fuel big bets on future innovations, and cut into their sky-high valuations.

Heading into 2023, recession fears and economic uncertainties are still weighing heavily on consumers and policymakers' minds, and interest rate hikes are expected to continue. Beyond that, the growing number of layoffs may also give certain tech companies some cover to take more severe steps to trim costs now than they may have otherwise done.

It's not just tech: Goldman Sachs will lay off as many as 3,200 employees this week as an uncertain economic and market climate pushes the bank to hunt for cost savings, according to a person familiar with the matter.

More than a third of the job cuts are expected to be from the firm's trading and banking units, the person said. Like its Wall Street rivals, Goldman Sachs has been hit by a slump in global dealmaking activity as fewer companies merge or seek to raise capital, reports my colleague Julia Horowitz.

UP NEXT

Earnings from Albertsons Companies and Bed Bath & Beyond.

Plus: US Fed Chair Jerome Powell is expected to speak on a panel in Stockholm, Sweden alongside Bank of England Governor Andrew Bailey, ECB Executive Board Member Isabel Schnabel, and others at 9 a.m. ET.

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WHAT WE'RE READING AND WATCHING

▸ Deere gives farmers long-sought ability to repair tractors (CNN Business)

▸ More severance issues for former Twitter employees (CNN Business)
▸ Virgin Orbit's rocket fails on first UK launch attempt (CNN Business)

▸ Ex-McDonald's CEO charged with misleading statements over firing (WSJ)

▸ Economist says tool that predicted eight recessions is wrong (Bloomberg)
▸ Venture capital's reckoning looms closer (FT)

FINAL WORD

Americans increased borrowing by $28 billion in November

Americans may still be spending money, but they're borrowing to do it. Borrowing rose by nearly $28 billion, according to Federal Reserve data released Monday.

That extends a historic stretch of reliance on debt during a year with soaring inflation, reports my colleague Alicia Wallace.

Economists were expecting a $25 billion monthly increase, according to consensus estimates on Refinitiv.

Outstanding consumer credit — which includes mostly credit cards, auto loans and student loans — grew at a seasonally adjusted annual rate of 7.1%, according to the report. Revolving credit, which includes mostly credit cards, grew by 16.9%.

It's the largest jump in revolving credit seen in three months and the fifth-largest monthly increase in Fed record-keeping that goes back nearly 55 years.

"I think we can attribute a lot of that [revolving debt increases] to holiday shopping," said Ted Rossman, senior industry analyst with Bankrate and Creditcards.com. "Of course inflation, no doubt, plays a role, but it seems to be accelerating once again after slowing a bit in the late summer, early fall."

The increases seen in outstanding credit outpaces the amount people are bringing in: Average hourly earnings were up 4.8% annually during November, according to the latest data from the Bureau of Labor Statistics.

"It's really revolving credit, mostly credit card debt, that's carrying the day right now," Rossman said. "A lot of that would be on essentials, some of it on discretionary stuff as well; but with the average credit card rate approaching 20%, it's a tough time to be growing your balance."