Option in both directions
Share Article via Email Key Points Tech and momentum stocks were under pressure Thursday and could face even more volatility as options on individual stocks, ETFs and indexes expire Friday.
There are also a myriad of income generating strategies as well. An investor can buy a call option if they think the share price is headed higher. A call option gives them the right to buy the underlying shares at an agreed price the strike price at any time until the option expires. And if an investor thinks a stock price is headed for a fall, they can buy a put option.
Large and small investors alike have been big buyers of options in some of these stocks, and they could move disproportionately in either direction as positions unwind.
Traders could dump their options on stocks like Apple and Tesla and exacerbate moves lower "but it really works in either direction," one strategist said.
Brendan McDermid Reuters This summer's heavy speculation in stock options helped drive frothy prices, and now it could create move volatility than normal in some of the market's best-loved stocks, as investors go through the quarterly process of expirations.
Options option in both directions stocks, ETFs, indexes and futures expire on the third Friday of the last month of the quarter, which is this Friday.
Investors either close out those positions or roll them forward. As a result, quarterly expirations create huge volume in the stock market as brokers on the other side of the options buy or sell securities into the expiration.
Frenzy in options trading could make this week more volatile for some favorite stocks
There's going to be enormous stock volume tomorrow like there always is. Some of the action is the result of big investors, like SoftBankbut another big driver has been retail investors.
In theory, that could exacerbate the move lower, but it really works in either direction," said Chris Murphy, Susquehanna Financial co-head of derivative strategy. VIDEO Trading Nation Murphy said retail investors are much more involved in options on individual stocks than they were a year ago.
That compares to open interest in ETFs. That was Murphy said individual investors may be more inclined to trade single stocks while institutions and bigger investors could be move involved in Option in both directions and indexes.
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With the shift in focus to individual stocks, that could make trading in those issues more volatile in both directions for the rest of the week. Emanuel said he's not concerned about the potential for excessive moves in stocks around expiration, but in general he has been concerned about aggressive buying in out-of-the-money calls in a few stocks.
Those calls, which bet on big moves higher, are priced at historic premiums to out-of-the-money puts, which bet on falling stock prices. Normally, it is more expensive to hedge against a downside move, but now it is more expensive in some names to hedge a move higher.
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But that type of options buying is acting as a negative warning for stocks, and it still illustrates too much froth. Emanuel said there was a turn in sentiment when the market sold off on Sept.
As for this week's expirations, Murphy said the Fed is the bigger driver of the stock market, but options positioning can be exaggerating moves in either direction. He pointed to Apple as an interesting example.
- It stands to make money regardless of direction, or even if there isn't a direction.
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Today we're below it, so it's in play. If it goes back below, there needs to be selling. They don't need as much of a hedge.
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So Goldman studied it and found that options activity is typically concentrated in a relatively small number of stocks. Goldman studied a period in towhen five stocks were at record highs and saw the most options activity.
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It did not have an adverse impact on the stock market. Related Tags.