Options trading by individual investors is fading, the latest sign that the stock market's speculative fever has broken.

Those individual investors had embraced options as a way of riding the stock market's momentum that drove shares of companies from $Apple(AAPL.US)$ to $NVIDIA(NVDA.US)$ to new heights. Now, the Federal Reserve's move to raise interest rates to tame inflation has thrown that dynamic into reverse, sending the prices of stocks skidding.

Individual investors made up 26% of total options activity in March, down from nearly 30% early last year. That marked the lowest level since March 2020, though was still well above prepandemic levels, according to calculations by Bloomberg Intelligence's Larry Tabb, who analyzed figures from the 12 largest online brokers.

Meanwhile, their share of stock-trading activity hit a low of 10.7% in January, based on data from the largest brokers. Activity has ticked up slightly since then but remains below levels last year when it peaked at 21%.

A punishing stretch of volatility has prompted many individual investors to abandon a host of momentum trades such as blank-check companies known as SPACs, crypto plays like nonfungible tokens and unprofitable technology companies. The aversion to risk has rippled out through markets, dragging down the S&P 500 16% this year. Many pandemic-era darlings like $Netflix(NFLX.US)$ and $PayPal(PYPL.US)$ have fallen much further.

"There was a real herd behavior" last year, said Viraj Patel, a global macro strategist at Vanda Research in London. "It's really hard to pick who's going to be winning in this environment."

In the week ahead, investors will be parsing commentary from Federal Reserve speakers as well as data on the housing market and consumer spending for clues on the path of interest rates and the economy. The Fed has become the driving force in markets, with many investors fearing its quest to tame inflation will result in a recession.

In light of this, the share of bullish call-options trades by individual investors has plunged to the lowest level since April 2020, another sharp reversal since the onset of the pandemic. Investors had rushed to scoop up options tied to companies like electric-vehicle maker $NIO Inc(NIO.US)$ and $GameStop(GME.US)$ as a way to turbocharge their bets that the stocks would keep rising. Those trades have slipped in popularity as the stocks have fallen 55% and 34%, respectively, this year.

"Last year, I would be much more aggressive," said Steve Dez, a 30-year-old actor who travels between California and Puerto Rico, of his options trading. This year, "the momentum loses steam quicker."

Calls give investors the right, but not the obligation, to buy shares at specific prices by a stated date. Because options allow traders to put down a relatively small sum of cash for potentially huge returns if their bets are right, investors can use them to magnify gains. However, the options can expire worthless and investors can lose their initial investments.

"Across the industry, [retail] options volume has seen something of a pullback," said Shawn Cruz, head trade strategist at TD Ameritrade. "Retail clients are moving away from single-name equity options and into broader, macro-based options like [exchange-traded funds] and index options."

Individual investors have also been increasing their exposure to exchange-traded funds, according to data from Vanda Research. Funds tracking the $S&P 500 index(.SPX.US)$ and $NASDAQ 100 Index(.NDX.US)$, alongside those offering turbocharged exposure to tech stocks, have been among the most popular. That helped purchases of ETFs by individual investors hit an eight-year high in early May.

Paul Soucy, a 65-year-old retired teacher in Cape Cod, said he has shifted from trading meme stocks like $AMC Entertainment(AMC.US)$ and SPACs to buying shares of consumer staples like snacks company $Mondelez International(MDLZ.US)$ and dividend-paying stocks that he thinks will perform well as inflation soars.

Mr. Soucy said he has been alarmed by some of the sharp post-earnings drops in individual stocks, making the market more unpredictable and tougher to trade options and shares.

"The market's been kind of crazy," Mr. Soucy said. "Some of the months I wasn't doing so well."

Of course, some of last year's strategies have retained their allure. Many individual investors have continued buying the dip in the stock market this year, fueling record amounts of purchases. Even meme stocks have come roaring back at times. And buying big tech stocks remains popular despite the volatility, according to Vanda Research.

One trade, in particular, shows no signs of abating. Options on $Tesla(TSLA.US)$ have remained the most popular among individual investors this year, Vanda Research estimates, just as they were last year. The company's shares have tumbled 27% this year.