Options aren’t my thing. I enjoy reading about @captainccs has used covered calls to provide significant income for himself. Other options are much riskier. All options are a bet on the direction of a security or market.
Higher Rates and Tech Selloff Fuel Options Boom
Spending surges on options tied to stocks such as Amazon, Nvidia after shares lose about half their value
By Eric Wallerstein, The Wall Street Journal, Jan. 9, 2023
Eyeing quick returns, many traders are selling contracts to reinvest the premium in ultrasafe short-term investments such as repurchase agreements that now offer their most attractive yields in more than a decade.
The trades helped push the weekly amount spent on new put option purchases and sales above $40 billion four times in the fourth quarter, according to an analysis of Options Clearing Corp. data by derivatives-analytics firm SpotGamma. That compares with a weekly average of less than $10 billion through the first three quarters of 2022…
One consequence of the boom in activity is in the ratio of equity put options to call options changing hands on Cboe. The ratio, traditionally seen as a measure of investor angst, recently rose to 2.4, after breaching 1.5 for the first time ever in December…
Despite the appearance of fear, other indicators suggest that options protecting from market turmoil are in low demand. The Nations TailDex, which measures the cost of put options that would pay out in a major S&P 500 decline, recently hit a near-decade low…[end quote]
Nations TailDex is an index measuring the likelihood of a “tail” or “black swan” event. It’s very volatile, with a 52-wk high of 34.75 and a 52-wk low of 5.86. This is exactly the kind of volatility I hate and avoid but I’m sure some high-risk types would schlurp it up.
Right now, the TailDex index is near a low point. That means the traders of this index don’t think an extreme “tail” event is likely. I agree with that. I think that the Fed has things under control at the moment. VIX is in a neutral channel. The Financial Stress Index is neutral.
But that doesn’t mean the market will rise from here. It just means that the market isn’t expecting a crisis. The market could follow the pattern of lower highs and lower lows that characterized 2022 quite calmly. The equity put options to call options ratio is exceptionally high. If traders are buying more puts than calls, it signals a rise in bearish sentiment.
I plan to wait out the stock market until after the Fed raises the fed funds rate to 5%.