Yahoo Finance’s Myles Udland, Julie Hyman, and Brian Sozzi discuss the Reddit-fueled stock rally with Chris Murphy of Susquehanna Financial Group.

Video Transcript

JULIE HYMAN: Well, the short squeeze continues for many heavily shorted stocks, as we talked about. Overall, stocks are down today, but as Jared pointed out earlier GameStop, AMC, Bed Bath and Beyond, some of these familiar names that we've seen really push higher in dramatic, dramatic fashion over the past few days, that move is continuing. A lot of this is all being influenced and the action is happening in the options market. So I want to bring in Chris Murphy, he is Susquehanna Financial Group co-head of derivatives strategy. Chris, we were just talking during the break you're saying this is pretty much all anybody's asking you about lately. It's a lot of what we're talking about, a high percentage of what we're talking about. What are you seeing in terms of the options activity that's sort of underlying some of the action that we see on our screens?

CHRIS MURPHY: Sure. Yeah, so we have a little bit of a different take on this. Obviously, the options volume and the option trading is a big impact. But it began as an epic short squeeze combined with this new retail presence. And so what ends up happening is market makers, who are short call options, as the stock goes higher need to buy more stock to hedge, and that increases the exposure they have on that specific option when the stock goes higher then they need to buy more stock to hedge, and it's somewhat of a cycle that can push the stock higher.

We have seen a record call volumes over the last couple of days. But one thing I want to point out that I think is being a little bit under-reported, is that I think most people would be surprised to hear that call open interest has not really changed much from the beginning of this year, when GME was $13 to now. And I haven't looked in my screen in five minutes, so I have no idea where GME is right now. But what's actually happening is in the call activity that we're just seeing just as much opening as we are closing.

So we're seeing what we think is a lot of retail trading, buying and selling the option in the same day, which somewhat muted the impact of those call options. And then on the flip side, I think many would also be surprised to see that put open interest is up almost three times. So you got call open interest, those are the existing call positions, pretty flat over the course of the year as the stocks run up. Put open interest is up almost three times. So what's that pointing to? Well, we obviously know how painful the short squeeze has been and it might be a situation where institutional investors, who are short these stocks, cannot take that pain any longer, but they still have convictions in the short position on GME. So their swapping into GME puts with a limited loss. Now those put's are expensive and they also price in a pretty steep hard to borrow, but you still know the maximum amount that you can lose when you purchase a put, versus if you short the stock as we've seen the losses are potentially infinite. So the narrative here--

JULIE HYMAN: Sorry, Chris?

CHRIS MURPHY: Mm-hmm?

JULIE HYMAN: So sorry. I just want to make sure I understand what you're saying. So you're saying that some of these people are going outright long, they're buying the underlying stock at this point and also buying puts?

CHRIS MURPHY: I think a lot of that put volume is, yes, buying the stock outright and often to close a short position that you are feeling some pain on, swapping into these put options, so that you still have that short position on but you have a limited amount that you can lose when you're holding those long put positions. I just think that all the focus on the call volume and the call trading, it's interesting to note that puts have traded more options than calls over the last couple of days and the open interest, the existing positions in the puts, is up almost three times this year versus the existing positions in the calls has not really changed that much.

BRIAN SOZZI: So Chris, for those in the trenches buying and selling this stock, what's the best strategy to not completely lose your shirt right now?

CHRIS MURPHY: Well like I said, options are very expensive, but when you look at a situation like this that you know how much you can lose with a call option, obviously, and they're expensive but they're priced a lot less than what GME stock is trading at right now. So if you're looking to position in the stock and you see how high volatility is and you see how risky it is in the stock, you can look at call spreads if you think there's more upside, which is buying one call and selling it further out of the money call, then you make the difference between those two if stock goes above the higher strike. But you know how much you can lose and you're not paying up for that expensive volatility because you're both buying and selling an option. So the volatility somewhat cancels out. Same thing on the downside. So this is a situation where you can use the options and their limited loss characteristic, and quantifiable loss characteristic, to express an opinion in a stock that's having such crazy volatility that GME is having.

MYLES UDLAND: Chris, I want to ask more broadly, I guess, about market structure and the impact that derivatives now have on the underlying? I mean there's famously more ETFs than there are individual stocks that are traded. And I'm just curious as a professional in this space, where do you think we go from here? Because we're kind of talking about the meta-play is influencing the actual thing itself, if that kind of makes sense. I'm just curious how you think this structure works out going forward? Because again, just the underlying impacting or the derivative impact on the underlying more the underlying matters. It's just kind of bizarro world, at least as I see it.

CHRIS MURPHY: Yeah. I mean, so two things. First of all, this new retail presence in the marketplace is not going away, whether it's in the underlying stocks or in the options themselves. I mean, you have a combination of what is viewed as a free trading, you have much easier access to information, much smoother access to information for retail traders than we had 10 or 20 years ago, whether it's through the internet, on message boards, or whatever the case may be. And you also have the ability to access markets on your iPhone, or your tablet, or whatever. So it's so much easier for retail investors not only to get involved, but also to have a lot more information behind their trading than they have in the past. So I don't think that is certainly not going anywhere.

And you have a situation where you talked about the explosion in ETFs, so let's look at something like the XRT. That's the retail ETF. GME is a component, as are a lot of these other heavily shorted retail stocks that have moved a lot higher recently. So you have people buying GME, that makes the XRT go higher. There's also a lot of other components in the XRT, which if you're trading that ETF you use them as a hedge. So the ripple effects just continue on, and on, and on, whether it's from the retail trading or just the ETFs.

JULIE HYMAN: Yeah, to your point, XRT at a record today. Chris Murphy, thank you so much. Maybe you can let us know when your calls start to-- meaning your phone calls or your chats start to slow down. Maybe that'll be a sign that this is petering out. Chris Murphy of Susquehanna Financial, the co-head of derivatives strategy. Thanks so much, Chris. Appreciate it.