Every generation has its bubble, and this time it is about options, Ed Harrison told Real Vision during today’s Daily Briefing.

Harrison discussed the phenomenon of small traders buying bullish call options, a trend that was on the rise before the pandemic and is now being amplified by it. Options are an attractive instrument to investors because they offer non-recourse leverage; you can control a larger notional position with a smaller premium. When interest rates are extremely low, the cost of carry on these options is much lower, which is undoubtedly driving retail investor enthusiasm.

Harrison said that this mania is having unforeseen consequences because individuals aren’t taking offsetting positions; there’s a broker dealer in the middle and they have to hedge that position. He explained that a market-maker doesn’t want to take a position, they just give you flow, and when they give that flow and the price moves, it’s a big move in terms of the delta hedging they have to undertake because these are very short-dated options.

“They are effectively short the stock and they have to go and buy, so a large move in the underlying price means you get a large delta hedging effect, and that amplifies the move tremendously,” he said.

Harrison warned that a retail investor can miss this complication completely and therefore is at risk of being blindsided.

Harrison also discussed his longer-term outlook regarding this bubble and for the financial economy and urged optimists to be cautious. He said maybe this time will be different, maybe we can close the gap by the market trading sideways for 10 years or so while things catch up, maybe we won’t see a sharp correction and a bear market—but he thinks there is still another shoe to drop.

READ ALSO  Chindata Group Seeks $500 Million U.S. IPO (Pending:CD)

You have to leave the possibility [there won’t be a bear market] open because of the kind of activity we’re seeing, he said, but he will be watching the real economy and leaning on historical precedent for insight into how things may play out in the future.

Harrison said that weakness in the real economy tends to induce weakness in share prices, so he’s paying attention to earnings and the economy.

“We can’t have multiple expansion even when earnings and the economy are down,” he said. “That’s what the catalyst will be; historical precedent says that manias don’t end well.”

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is pretty obvious, but we should probably say it anyway so that there is absolutely no confusion… The material in REAL VISION GROUP video programs and publications (collectively referred to as “RV RELEASES”) is provided for informational purposes only and is NOT investment advice. The information in RV RELEASES has been obtained from sources believed to be reliable, but Real Vision and its contributors, distributors and/or publishers, licensors, and their respective employees, contractors, agents, suppliers and vendors(collectively,”Affiliated Parties”) make no representation or warranty as to the accuracy, timeliness or completeness of the content in RV RELEASES. Any data included in RV RELEASES are illustrative only and not for investment purposes. Any opinion or recommendation expressed in RV RELEASES is subject to change without notice. RV Releases do not recommend, explicitly nor implicitly, nor suggest or recommend any investment strategy. Real Vision Group and its Affiliated Parties disclaim all liability for any loss that may arise(whether direct, indirect, consequential, incidental, punitive or otherwise) from any use of the information in RV RELEASES. Real Vision Group and its Affiliated Parties do not have regard to any individual’s, group of individuals’ or entity’s specific investment objectives, financial situation or circumstances. RV Releases do not express any opinion on the future value of any security, currency or other investment instrument. You should seek expert financial and other advice regarding the appropriateness of the material discussed or recommended in RV RELEASES and should note that investment values may fall, you may receive back less than originally invested and past performance is not necessarily reflective of future performance.Well that was pretty intense! We hope you got all of that – now stop reading the small print and go and enjoy Real Vision.

READ ALSO  Failure To Launch New Fiscal Stimulus Would Have Catastrophic Consequences For The US Economy

Via SeekingAlpha.com