Put It Away – Options Trend
If there’s one thing you can say about the stock market, it’s that there is always a trend going on with investors of all sorts. Options, for example, have had quite the ride throughout the pandemic, influencing movement in the stock market for the first time in a while. An options contract essentially leverages your position by giving you the right to buy or sell 100 shares at a set price on a certain date, and they are known for their volatility. Retail investors didn’t fear that volatility and used options as an independent financial instrument to trade, which is extremely risky. This spike in call option trading, or buying 100 shares at the set price, coincided with the meteoric market rally of 2020 and 2021 where everything seemed to be in a frenzy. After the market cratered in 2022, we saw a massive slowdown in options trading, but it looks like it could be coming back in a different way.
Data from the end of 2022 indicates that investors are utilizing put options, or “bearish options” to capitalize on the downturn in many tech names that we have witnessed. Put options are when you get to sell 100 shares at the set price instead of buy, placing you in a leveraged short sell essentially. As if short selling wasn’t risky enough! Put options are generally utilized by funds to hedge against their bullish position in case a downturn occurs, but individually trading them is highly recommended against. The rise in put option volume also highlights one of the market’s favorite fear indicators: the put-call ratio, which is meant to see how pessimistic investors are. For the first time in history, the ratio broke the level of 1.5, and it now sits at 2.4 which is an all-time high. Despite this, analysts believe that investors aren’t as fearful as it seems, which is reassuring considering this ratio is outrageously high now. Although options can be an extreme adrenaline rush, it’s a lot safer to utilize them with shares to reduce your risk.
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.