Do traders who place big bets make big money?

0:01Cardiff Garcia:NPR.

0:11Stacey Vanek Smith:This is The Indicator from Planet Money. I'm Waylon Wong, and today it is the return of Ricky Mulvey. Ricky is the co-host of the Finance and Investing podcast, This Time is Different. Hi, Ricky. Hey, Waylon.

0:25Cardiff Garcia:Good to see you.

0:25Stacey Vanek Smith:Good to see you too. And you are here because you have been doing some whale watching.

0:30Cardiff Garcia:Not belugas or narwhals. I have become obsessed with option whales. These are traders, sometimes institutions, sometimes wealthy individuals who place large bets using something called options. They're not necessarily buying a stock itself. They're buying the right to buy an asset like a stock at a certain price with a set expiration date. It's essentially a bet on what the price will be within that time frame.

0:57Stacey Vanek Smith:And sometimes those bets are worth tens of millions of dollars. A recent example, one whale placed a$74 million bet on one company's stock price.

1:08Cardiff Garcia:I wanted to know, did this trader know something? Were they making easy money? But these questions grew into something larger. I became obsessed with options whales. I decided that I must find one, any whale for this story, to understand what they're doing. I would find an options whale no matter the physical or mental cost, no matter the toll it took on my relationships, no matter how many C's I had to cross.

1:32Stacey Vanek Smith:Okay, Ahab, so how did it turn out?

1:35Cardiff Garcia:The journey was significantly shorter than I anticipated, and I quickly found one.

1:39Stacey Vanek Smith:Well, call me Ishmael. Today on the show, we are going inside the world of option whales, who they are, what they're doing, and why these massive bets don't always pay off.

1:50Cardiff Garcia:That's after the break.

1:55Cardiff Garcia:This message comes from the BBC with its new podcast, The Interface. Every Thursday, three leading tech journalists explore how tech is rewiring your week and your world. Listen to The Interface on bbc.com or wherever you get your podcasts.

2:12Stacey Vanek Smith: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.

2:24Cardiff Garcia: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.

2:35Stacey Vanek Smith:Right. 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.

2:55Cardiff Garcia:In 2019, traders exchanged about 5 billion contracts for U.S.-listed options. Last year, they exchanged more than 15 billion.

3:04Stacey Vanek Smith:So I would say it is a phenomenon that's kind of a post-COVID phenomenon.

3:10Cardiff Garcia:That's Amy Wu Silverman with the Royal Bank of Canada.

3:13Stacey Vanek Smith: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.

3:28Cardiff Garcia: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.

3:36Stacey Vanek Smith:Now, for big institutions, it's not just about speculation and growing their income. They will often use options to protect their investments.

3:45Cardiff Garcia:Imagine that you're investing for thousands of people's retirement funds. If your stocks go to zero, you can hurt people's livelihoods.

3:52Stacey Vanek Smith: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.

4:21Cardiff Garcia:Sometimes whales trade options as a part of a more complex trade. It's always very interesting to hear other people talking about your trading activity and speculating about what it means. rather than just asking.

4:33Stacey Vanek Smith:This is our whale, Mike Ko, founder of Open Interest Pro, and a strategist for the Yield Max family of ETFs at Tidal Financial Group. These are investment funds with options.

4:45Cardiff Garcia:And Mike's firm trades a lot of options. You know, we trade 8 million contracts a week on about 100 stocks. 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. 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.

5:15Stacey Vanek Smith: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.

5:24Cardiff Garcia: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. I'm Matt Sankum, and I am the CEO of Unusual Whales.

5:42Stacey Vanek Smith:Unusual Whales is an investment service that tracks options trading.

5:46Cardiff Garcia:Matt looks for spikes in activity to see if the whales are changing their behavior, particularly on investments they don't often trade. 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?

6:01Stacey Vanek Smith:Matt believes that these lines are worth paying attention to, these spikes in activity.

6:07Cardiff Garcia: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.

6:19Stacey Vanek Smith: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.

6:27Cardiff Garcia:This was a large entity, but interestingly didn't seem to have a very professional connection to their broker. Translation, this was a large bet, but it didn't appear to come from a major Wall Street firm.

6:40Stacey Vanek Smith: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.

6:48Cardiff Garcia: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.

7:03Stacey Vanek Smith: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.

7:17Cardiff Garcia:But some whales are confident for a good reason, especially if they might have information that the rest of us don't.

7:23Stacey Vanek Smith: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.

7:39Cardiff Garcia: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.