In many ways, Tesla epitomizes today's market, in which retail and institutional investors have chased companies promising high growth. The car maker has become synonymous with 2020's hot momentum trade -- piling into stocks that have climbed the fastest and furthest. Few stocks can match the velocity with which Tesla has soared.
Data from Société Générale SA as of June show that individual investors tend to prefer stocks that have risen the most over the past three months. Traders using the Robinhood Markets Inc. brokerage increased their holdings of such shares dramatically since March, outpacing investments in companies with the worst price performance. Investors have also piled into exchange-traded funds tracking the momentum trade.
And like the broader market, Tesla has been painfully difficult to bet against. Few saw its dramatic rise coming, and the ascent continues to alarm, and burn, many investors who sought to profit from its demise.
Technical dynamics help explain the stock's mind-boggling gains, since bearish wagers on the company have inadvertently fueled Tesla's rise, and derivatives bets tied to its advance have helped intensify the rally.
Many investors aren't just buying small dips in the stock market or individual shares like Tesla. They are looking for turbocharged trades that profit when individual stocks quickly rise and, at times, borrowing money to bet big.
Stock-options volumes jumped to a record this year, and trades that pay out if stocks continue to soar have been popular in recent months. These derivatives, known as call and put contracts, allow investors to put down a small amount of cash for a potentially quick and outsize return if their bets prove correct. Although they can magnify profits, they are extremely risky.
These trades are increasingly influential on the stock market itself. Mammoth options bets by big investor SoftBank Group Corp. helped drive the market's recent roller-coaster, along with trades from individual investors.
Barclays research shows that stocks benefiting from the highest increase in options trading over the past year have outperformed the market this year. In addition to Tesla, these stocks include Amazon.com, Apple, Microsoft, Shopify Inc., among others.
"You're getting a real squeeze that's bigger than it normally would be," said Cem Karsan, a senior managing partner at hedge fund Aegea Capital Management LLC. He says he has bet against some tech stocks this year and bought options that would profit if the tech sector soared through the end of the year. "These things always go further than you could possibly imagine."
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
