Retail Investors Ignite a Meme Stock Frenzy Amid High Interest Rates

As day traders eye potential gains, options trading sees a surge in activity. The retail investment community has reignited its passion for meme stocks, fueled by positive signals from the Federal Reserve, anticipated earnings from GameStop Corp.( $GME), and soaring stock prices, creating a wave of excitement among day traders.

The volume of options trading by individual investors has increased, with a particular interest in call options to capitalize on the continuing upsurge in already buoyant equity indexes. Following Reddit Inc.’s ( $RDDT) highly successful initial public offering last week, investors quickly turned their attention to purchasing shares, leading to a notable 15% increase in GameStop shares on Monday and pushing Bitcoin to new heights.

While institutional traders have also been active, with the S&P 500 Index reaching 20 new highs in just under three months this year, there’s been a slight uptick in the demand for put options, reflecting a growing skepticism among technical strategists about the potential for further stock gains. For many on Wall Street, the current high valuations suggest a correction may be imminent. Conversely, for numerous retail traders, these conditions signal an opportunity to increase their investments. Following the Federal Reserve’s hint at three upcoming rate cuts this year, the S&P 500 experienced its most significant weekly rise in three months, up 2.3% last week.

Meanwhile, shares favored by the Wall Street Bets community have surged, outpacing the more modest gains of the S&P.

This trend continues a pattern observed throughout the year, challenging Federal Reserve Chair Jerome Powell’s stance that sustained high rates have yet to curb speculative investing. The proportion of options trading conducted by retail investors reached a new peak earlier this year, with only a slight decrease in recent weeks, as reported by JPMorgan Chase & Co. This enthusiasm drove the average daily options trading volume in February to record highs, according to the Options Clearing Corporation.

The digital asset sector has seen similar dynamics, with Bitcoin increasing by approximately 65% since the beginning of the year. Shares linked to cryptocurrencies, such as Robinhood Markets, Inc. and Coinbase Global Inc., have also seen significant gains. Meanwhile, institutional traders have exhibited a cautious approach, with a slight increase in the cost of put options at the start of March, as indicated by a rise in the Cboe Volatility Index (VIX) from last year’s lows. Nonetheless, the overall market sentiment remains overwhelmingly optimistic.