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Looks like nobody's safe. In today's Journal:
Options Markets Become Pricey, by TENNILLE TRACY
The options market has become an expensive place to do business in recent days, and that could be contributing to the wild swings in the stock market.
The options market often serves as a buffer to the stock market, providing a venue for investors to protect their portfolios or speculate on future moves without actually buying or selling stock.
In recent days, however, the prices of options have skyrocketed -- in part because the market has been so volatile. Options that once traded for a few dimes now cost more than a dollar, or even several dollars. And that is especially true for put options, which are bearish contracts that convey the right to sell a company's stock at a fixed price.
As a result, investors who would normally buy puts to protect their stock holdings might be electing to sell the shares altogether. It is almost as if they realized the monthly payment on their car insurance jumped from $100 to $1,000, and they decided to sell the car as a result, says Randy Frederick, director of derivatives with Charles Schwab.
"Investors are concerned and want to hedge their positions," Mr. Frederick said. "But when the put options that you would've normally bought now cost two and three times as much, the puts become very unattractive."
The same goes for traders who buy options to speculate on future swings. As the prices of options become more expensive, traders who want to position for a drop lower now look to sell stock short or turn to exchange-traded funds, like the ProShares UltraShort Financials fund, that pursue similar strategies.
At the end of the day, that means there are likely to be new players flocking to the equities market to execute a strategy. That helps to propel the dramatic swings that investors witnessed Friday, when the Dow industrials swung within 1000 points over the session.
While it is difficult to determine how many have fled the options market as a result of higher prices, recent volumes suggest some players have left. In the two-week period ended Oct. 3, which coincided with the SEC's ban on short selling, average daily volume reached 14.2 million, below the 2008 daily average of 14.7 million.
Link to the article: Options Market Becomes Pricey - WSJ.com
Options Markets Become Pricey, by TENNILLE TRACY
The options market has become an expensive place to do business in recent days, and that could be contributing to the wild swings in the stock market.
The options market often serves as a buffer to the stock market, providing a venue for investors to protect their portfolios or speculate on future moves without actually buying or selling stock.
In recent days, however, the prices of options have skyrocketed -- in part because the market has been so volatile. Options that once traded for a few dimes now cost more than a dollar, or even several dollars. And that is especially true for put options, which are bearish contracts that convey the right to sell a company's stock at a fixed price.
As a result, investors who would normally buy puts to protect their stock holdings might be electing to sell the shares altogether. It is almost as if they realized the monthly payment on their car insurance jumped from $100 to $1,000, and they decided to sell the car as a result, says Randy Frederick, director of derivatives with Charles Schwab.
"Investors are concerned and want to hedge their positions," Mr. Frederick said. "But when the put options that you would've normally bought now cost two and three times as much, the puts become very unattractive."
The same goes for traders who buy options to speculate on future swings. As the prices of options become more expensive, traders who want to position for a drop lower now look to sell stock short or turn to exchange-traded funds, like the ProShares UltraShort Financials fund, that pursue similar strategies.
At the end of the day, that means there are likely to be new players flocking to the equities market to execute a strategy. That helps to propel the dramatic swings that investors witnessed Friday, when the Dow industrials swung within 1000 points over the session.
While it is difficult to determine how many have fled the options market as a result of higher prices, recent volumes suggest some players have left. In the two-week period ended Oct. 3, which coincided with the SEC's ban on short selling, average daily volume reached 14.2 million, below the 2008 daily average of 14.7 million.
Link to the article: Options Market Becomes Pricey - WSJ.com