When in doubt, get out.
The old saw expresses the view that investors should stay on the sidelines if they have doubts about what is going on in the stock market.
The axiom appears to be being re-engineered at the end of 2021 as the market continues to climb into record territory, ruling out the impact of another Covid surge and the Federal Reserve’s plan to end the easy money policies that have supported the economy for so long, and thus financial markets.
Instead of exiting, traders delve deeper into the market. To do this, they use options, which have emerged during the pandemic as an investment that is often more popular than stocks.
The new axiom — when in doubt, sell far put options — is evident throughout the market. Some investors sell bearish sell orders that expire in January and February with strike prices well below the associated stock market price. Trades often pay around 50 cents to $1 per contract for investors who want to buy shares at say 20%-30% less than current stock prices.
Buying and selling activity is notable for the large number of contracts involved in each trade, which equates to a greater number of shares and a diversity of shares.
The activity is notable because one rarely sees such large trading volumes at strike prices which are so far below the related stock prices. Most investors tend to sell put offers at strike prices about 5% to 10% lower than stock prices.
Alison Edwards, a strategist at Susquehanna Financial Group, recently told clients that she’s seen out-of-the-money sales with most of them expiring for January in a variety of stocks over the past two weeks. traded in
what or what
(stock ticker: WHAT),
Detailed sample procedure includes sales of 6000
(Dash) Jan 110 puts 6000
(DDOG) January $140 and 12,000
(LCID) Feb 25 dollar puts.
It is always difficult to analyze someone else’s trades, but mode sales seem to be motivated by a simple desire to own the shares at lower prices. Instead of doing nothing and waiting for the market to weaken, these investors found a way to make a return on their money.
Such trading has always been the prerogative of wealthy investors, who routinely sell such offers on
S&P 500 . Index
As an advanced cash management strategy. If the stock continues to advance, the investors keep the money received for the sale sale. If they have to buy shares, they do so at very low levels.
We have long endorsed the cash-secured vending trade, and we continue to do so. However, consider a possible evolution of the usual approach: wait until the market drops sharply and the fear premium increases the value of the dips.
If that happens when investors return from the holidays, long-term investors can consider selling preferred stocks in the midst of market turmoil to extract a really big risk premium. Put premiums have to go up if stock prices fall.
Admittedly, the strategy is as boring as it is effective, but this provides a nice respite at a time when the world has once again been surrounded by so much drama.
Stephen M. Sears is president and chief operating officer of Options Solutions, an asset management company. Neither he nor the Company has a position in the options or the underlying securities mentioned in this column.
email: [email protected]