Robinhood traders cash in on the market comeback that billionaire investors missed. Small trader call buying made up more than 50% of total volume last week, the highest since 2000.

[CNBC] Robinhood traders cash in on the market comeback that billionaire investors missed. One Chicago-resident flipped his sister’s stimulus check into nearly $10,000.

One 26-year-old Robinhood trader made $1,500 in less than 24 hours betting on a beaten-down airline stock, while many so-called experts on Wall Street warned about buying into an overvalued stock market that was bound to tumble again amid the coronavirus pandemic.

Last Thursday, Lequon Godbolt, purchased a call option for American Airlines that made him $200 on the millennial-favored stock trading app.

After seeing reports that the airline was increasing domestic flying for summer travel, Godbolt bought another call option minutes before the close. When the market opened higher last Friday after a surprisingly positive jobs report, Godbolt raked in his profits.

“I just started taking it seriously about two months ago,” Godbolt — a New York resident— told CNBC. “I’ve been watching AAL since the beginning of that time and I felt eventually, once Covid relaxed, markets would move up.”

Godbolt is not alone is his success trading this market. One Chicago-resident flipped his sister’s stimulus check into nearly $10,000.

Robinhood traders lived up to their outlaw name during the coronavirus market downturn. The young investors booked profits — trading stocks with some of the best returns in the past two months — while other Wall Street veterans were left scratching their heads.

“There’s nothing like momentum begetting momentum,” Tim Welsh, founder and CEO of wealth management consulting firm Nexus Strategy, told CNBC. “The aspect of just access is really driving a lot of this and the whole upward tick in the markets, again, just fuels demand.”

Young investors, like Godbolt, appeared to have a prescient understanding of the market, unlike the billionaire hedge fund managers who said stocks would retest their lows. Longtime investor Stanley Druckenmiller — who misjudged equities’ comeback — said Monday that the market’s strong performance over the last three weeks has “humbled” him and that he underestimated the power of the Federal Reserve.

Small trader call buying made up more than 50% of total volume last week, the highest since 2000: Sundial data

Speculative excess has surged to the highest in at least 20 years among U.S. options traders — and that’s a negative for stocks over the medium term, according to Sundial Capital Research Inc.

Traders established fresh bullish positions last week by buying 35.6 million new call options on equities, according to Sundial founder Jason Goepfert. That’s up from a peak of 28.7 million in February, when speculative activity was rampant, he wrote in a note Monday.

“Options traders make stunning bets on rising prices,” Goepfert wrote. “This kind of activity has a strong tendency to lead to negative returns in the S&P 500 and other indexes over a multi-week to multi-month time frame.”

At the heart of the speculative activity are smaller investors, according to Sundial. Small trader call buying made up more than 50% of total volume last week, the highest since 2000, it said.

Past instances when bullish small trader positions made up 45% or more of volume preceded a median loss for U.S. stocks of about 3% in two months time and 15% in a year, according to the note.

“Small traders are pushing their luck in a major way,” said Goepfert. “It seems increasingly risky to try to chase this rally along with traders who have traditionally been extremely reliable contrary indicators.”

In latest market rally, even companies filing for bankruptcy get love

Still, it’s a mystery why money is flowing into these businesses, as their bonds are trading at beaten-down prices that imply there will be little left for equity holders after the bankruptcy process is complete and the company is reorganized, said Lale Topcuoglu, senior fund manager at J.O. Hambro Capital Management.

Hertz’s bonds due to mature in 2022 were trading near 40 cents on the dollar, according to MarketAxess data, widely considered in distressed territory.

During Chapter 11, anyone who has a stake in the company will decide how its reconstituted, and who gets paid what. Reflecting a ladder of obligations, debt investors will receive priority when new shares in the reorganized company are issued and the bonds restructured. Equity holders could receive some of these new shares, but usually the Chapter 11 process will wipe out the value of their holdings.

Take Whiting Petroleum, for example. Its stock closed at $0.85 a share last Thursday, and has since surged to $2.21 a share.