1. Investors Are Forgoing Crash Insurance In Options Market
The options market has been under pressure since last week. There have been many factors contributing to the recent decline in prices including the fact that the CBOE Volatility Index (VIX) hit its highest level since October 2008. The VIX measures implied volatility in the S&P 500 index. When investors believe that the stock market is overvalued they will sell put options. These options allow them to sell their shares at a predetermined price if the share price falls below that amount. This means that investors are selling insurance for the potential crash in the stock market. If the stock market does drop then these investors would lose money. However, if the stock market rises above the strike price then they make money.
2. Options Trading Is A Risky Business
Options trading is a risky business. The riskiest thing about options trading is that you do not know what the future holds. You could potentially lose everything if the stock market drops significantly. Therefore, it is best to only trade options with a broker who offers stop loss orders. Stop loss orders automatically close out trades once the price reaches a certain point. This way, you cannot lose everything if the stock goes down.
3. Options Traders Are Not Buying Stock Before Earnings Announcements
There is no evidence that traders are buying stocks before earnings announcements. According to Reuters, the number of calls traded was higher than puts traded. Calls are bets that the stock price will rise while puts are bets that the stock will fall. Since the calls were being bought, it suggests that investors are expecting the stock to rise.
4. Investors Are Selling Put Options On Large Cap Stocks
Large cap stocks are considered safe investments. They are companies that generate high profits and pay dividends. Investors are selling put options on large cap stocks because they expect the stock to go up. As long as the company continues to pay dividends investors will continue to buy the stock.
5. Investors Are Selling Call Options On Small Cap Stocks
Small cap stocks are considered risky investments. They are companies with low profit margins and little cash flow. Investors are selling call options on small cap stocks because they expect a big drop in the stock price. If the stock price drops then investors will lose money.