A (2:57)

You may have Seen an option before outside the world of investing. If you're browsing for airline tickets, you can pay the airline a fee to freeze the current ticket price, which you can then buy at a later date.

B (3:09)

So if in the meantime the airline ticket rises in price, you're going to be happy that you locked in a cheaper fare if the price goes down, yeah, your ticket price has gone down, but you've lost that fee, right?

A (3:21)

In the world of markets, this is functionally called a call option. Traders can pay for the right to buy an investment at a certain price within a certain time period. And interest in options trading has exploded. Traders are paying each other for the rights to buy and sell investments at agreed upon price points.

B (3:40)

In 2019, traders exchanged about 5 billion contracts for U.S. listed options. Last year, they exchanged more than 15 billion.

A (3:49)

So I would say it is a phenomenon that's kind of a post Covid phenomenon.

B (3:55)

That's Amy Wu Silverman with the Royal bank of Canada.

A (3:58)

Amy says it's not only that more whales are playing in the same market. The market is also changing from times past. We didn't have weekly options, we didn't have daily options, and so you kind of were forced to kind of play in the one to three month space.

B (4:14)

Now traders can make these bets in shorter windows of time, speculating for as little as one day out, instead of only planning for months out.

A (4:21)

Now, for big institutions, it's not just about speculation and growing their income. They will often use options to protect their investments.

B (4:30)

Imagine that you're investing for thousands of people's retirement funds. If your stocks go to zero, you can hurt people's livelihoods.

A (4:37)

So institutions will buy options to guarantee a price at which they can sell those investments. They aren't trying to make money, but rather prevent a catastrophic loss. You essentially want insurance the same way you own insurance on your house because of a flood or fire. They think about their portfolios that way because for a lot of institutions, that money that they're protecting is one day going to be for someone's 401k or someone's pension plan, and they have to make sure that it's there.

B (5:06)

Sometimes whales trade options as a part of a more complex trade.

D (5:10)

It's always very interesting to hear other people talking about your trading activity and speculating about what it means, rather than just asking.

A (5:18)

This is our whale, Mike Koh, founder of Open Interest Pro and a strategist for the Yieldmax family of ETFs at Tidal Financial Group. These are investment funds with options, and

B (5:30)

Mike's firm Trades a lot of options.

D (5:33)

You know, we trade 8 million contracts a week on about 100 stocks.

B (5:39)

Mike has multiple funds and multiple option strategies, sometimes on the same stocks. He's trying to juggle different bets to squeeze out some income and not lose his shirt.

D (5:48)

As traders, we are not, you know, we're not sort of thinking about what this person is doing. We're really thinking about just numbers, frankly. So. And many times this is completely algorithmic.

A (6:00)

So to recap, there are more whale options trades because the whole market has been growing, and these traders have a larger menu to select from.

B (6:09)

A lot of the activity is pedestrian. Some whales are using options for insurance or buying them because an algorithm told them to. These are the regular whales. But this isn't the only reason whales trade options. Some whales are a bit more suspicious.

D (6:23)

I'm Matt Sankom, and I am the CEO of Unusual Whales.

A (6:26)

Unusual Whales is an investment service that tracks options trading.

B (6:31)

Matt looks for spikes in activity to see if the whales are changing their behavior, particularly on investments they don't often trade.

D (6:38)

Imagine a restaurant in a quiet neighborhood that all of a sudden has a line out the door. Seems like something might have changed, right?

A (6:46)

Matt believes that these lines are worth paying attention to these spikes in activity.

B (6:51)

Matt's team helped us look into some speculative options activity. Remember the $74 million bet at the beginning of the show? This was on the price of Taiwan Semiconductor stock, the company that manufactures Nvidia's chips.

A (7:04)

This trader was hoping the price of the stock would go up. And when Matt's team looked at the trade, he noticed a few odd things.

D (7:12)

This was a large entity, but interestingly, didn't seem to have a very professional connection to their broker.

B (7:20)

Translation, this was a large bet, but it didn't appear to come from a major Wall street firm.

A (7:25)

You might expect that this options whale coming out of the deep blue would have a reason to be so confident that the stock's price would move up.

D (7:34)

Oftentimes, you give the whales the benefit of the doubt, and you assume that their size equals some level of conviction or research. However, it mostly appears that this guy picked a direction very confidently and was wrong.

A (7:48)

That's right. That $74 million bet we told you about at the top was a dud. The stock did not move up the way they thought it would, and the whale lost money on this big trade. Confidence does not always pay off.

B (8:02)

But some whales are confident for a good reason, especially if they might have information that the rest of us don't.

A (8:08)

Unusual Whales has noticed some odd activity around political announcements. Let's go back to the days of press conferences about tariffs. If you recall, in April of last year, markets were not happy when President Trump first announced sweeping tariffs.

B (8:23)

But then a few days later, President Trump posted on Truth Social that he was pausing tariffs for 90 days, news that the markets cheered.

A (8:31)

Right before the announcement about that tariff pause, somebody placed a large bet the S&P 500 would go up in value. And they were right.

B (8:40)

Those lucky ducks made close to $200 million.

D (8:44)

This position was open before Trump posted Bye on Truth Social. So it's almost as if maybe someone knew he was about to pause this thing. Now we don't know for sure, and we can't know for sure.

B (9:00)

The timing was striking. This bet did not have much room for error.

D (9:03)

It was only that day they had a chance to make a profit on this trade.

B (9:06)

Yep, sometimes the timing raises questions, especially

A (9:10)

in the world of politics. Republican and Democratic Congress members can trade stocks and options while they are serving in government. Matt says that's a conflict of interest.

D (9:20)

They're more likely to invest and trade in stocks where they sit on a committee that regulates those industries.

B (9:29)

These types of suspicions prompted legislation. Multiple acts are working their way through Congress. The Stop Insider Trading act would prohibit members of Congress and their immediate family members from purchasing publicly traded stocks. And the Restore Trust in Congress act would ban members from owning stocks and trading altogether.

A (9:48)

Neither of these acts have been signed into law.

B (9:50)

You know, Waylon, I think I want to run for Congress in the meantime. Oh yeah?

A (9:54)

What's your position gonna be?

B (9:56)

Probably a tech stock.

A (9:57)

Okay, great. Drinks on you. This episode was produced by Julia Ricci with engineering by Sina Lofredo. It was fact checked by Cory Bridges. Cake and Cannon is the show's editor and the indicator is a production of npr. Planet Money wrote a book and we are going on tour. If you you live in New York, Boston, Washington, D.C. pittsburgh, Louisiana, San Francisco, Seattle, Portland or Chicago. We'll have special guests stories and take your questions. I'll be at the Chicago one. Tickets are at planetmoneybook.com, you can find a link in the show notes. This message comes from Capella University. That spark you feel? That's your drive. For more. Capella University's flexpath learning format lets you earn your degree at your pace without putting life on pause. Learn more@capella.edu.

C (10:46)

this message comes from Bombas. You need better socks and slippers and underwear because you should love what you wear every day. One purchased equals one donated. Go to bombas.com NPR and use code NPR for 20% off. This message comes from Greenlight. Parents say financial literacy is the hardest life skill to teach. Greenlight's debit card and money app for families makes it easy for kids to learn to earn, save and spend wisely. Start today risk free@greenlight.com NPR.