Now, with the USN income additional payments suddenly coming out of inflated valuations, investors are urgently trying to understand how activity in derivatives markets sent Apple, Tesla and a host options just hot stocks to record highs — and what might happen next.
So what are options? Equity options provide investors with the right to buy or sell a stock in the future at a fixed price somewhere above or below where it is currently trading.
One options trader is betting the small cap pullback is just beginning
They serve an important purpose of hedging investment portfolios against losses, but they also have a long history of fanning big gains and losses for speculators. A call option — the right to buy a stock — options just profitable if the share price rises beyond the agreed level.
A put option — the right to sell a stock at a given price — can be valuable in the event of a sharp fall in prices. Buyers of options have to pay a little money for the contract, but not much relative to the money that can be made or saved if the underlying shares move sharply.
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Investors with equity portfolios most often like to own puts as insurance to guard against a big drop in the broader market. But in the past few months, this has been flipped on its head for mega-cap tech stocks and there has been rampant buying of call options — particularly on Apple and Tesla.
It has looked to some veterans like a speculative mania.
Они образовывали решетку -- столь же непостижимую для него и лишенную всякого смысла, какими для древний людей были звезды. Он неотрывно смотрел на этот рисунок в течение нескольких минут и не заметил, чтобы цветные эти огоньки меняли свои места или яркость. Впрочем, подумал Олвин, загляни он в свой собственный мозг, то понял бы не. Машина представлялась инертной и неподвижной, потому что он не мог наблюдать сам процесс ее мышления. Только теперь он начал смутно догадываться о силах и энергии, обеспечивающих существование города.
Investors betting that tech stocks will increase further in value have far outweighed those buying options that protect their holdings from lower share prices. The put to call ratio in Apple stock on Monday was the lowest in at least 10 years, according to Bloomberg data; the ratio for Tesla last month set a four-year low.
Who has been driving the option activity?
The distinction between American and European options has nothing to do with geography, only with early exercise. Many options on stock indexes are of the European type. Because the right to exercise early has some value, an American option typically carries a higher premium than an otherwise identical European option.
A combination of retail investors and large funds have jumped on the tech call option bandwagon. Funds already sitting on big gains have been happy to recycle a little of their profit to further leverage their portfolios and aggressively buy calls.
Retail investors, trading on options just platforms such as Robinhood — free of commissions — have also embraced options trading in record numbers and chased big tech names. What does such one-sided activity mean for the broader market?
Так это, значит, и есть тот самый спутник, которого ты привел с собой из путешествия.
The scale of call buying has triggered a number of market dislocations and led traders to see a feedback loop that pushed tech stocks dangerously high. Connecting the activity in the options market with the stock market itself are the dealers who sell options. These dealers — which include big banks such as Goldman Sachs, JPMorgan and Morgan Stanley, and market makers like Citadel Securities — would options just exposed to losses on call options if share prices spike and they have not hedged their exposure.
The dynamics in the options market are certainly becoming a bigger part of the equity market David Silber, head of institutional equity derivatives for Citadel Securities To hedge that risk, dealers can purchase the underlying stock, so they also get a piece of any share price spike. Their buying, in turn, pushes up the underlying stock, creating a self-fulfilling run that helped to push Tesla and Apple to all-time highs this week.
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Normally, such measures of volatility are slumbering when markets are going up. The divergence was a stark warning for equity bulls.
What goes up can come down Crowded trades become very dangerous when juiced by the power of options activity and a tipping point was reached this week. That suggests a period of elevated volatility and further downside for tech shares, but it also sets the stage for volatility traders to step up options just help calm down the market once the dust settles. Equity investors, meanwhile, are likely to buy a dip in prices given ultra-low interest rates on bonds have made stocks more attractive and revenues of big tech companies have proven insulated from the downturn this year, compared to other industries.
The main takeaway is that options trading will remain a key part of the picture. Get alerts on US equities when a new story is published Get alerts.
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