Thursday, September 29

Investors buy derivatives to protect themselves on Wall Street

Although the rise continues in the american market, investors are not neglected and increase their positions in derivatives to protect yourself from a possible correction according Eric Platt y Madison Darbyshire en Financial Times.

Investors are buying put option contracts in increasing amounts, in the hope that they will provide a cover if stocks fall from record territory. The increasing use of these, including the increase in new retail daily investors entering the markets this year, has accompanied an increase in volatility in the stock market of $ 53 trillion de EE. UU.

Stocks have soared over the past month as investors grappled with the spread of the Omicron variant of the coronavirus, tighter monetary policy from the U.S. Federal Reserve, and the prospect that the $ 1.75 trillion White House flagship spending bill could stall in the Congress.

This has pushed retail and institutional investors to adopt put options, which can pay off if a security falls in price. It’s a notable change, particularly among retail investors who this year had been tireless buyers of call options, derivatives that can pay off if a stock increases in value.

“When there’s inflation, record asset prices, and rising interest rates, that makes for a pretty perfect storm for people wanting to buy a little extra protection,” he said Tom Sosnoff, Co-Founder of Tastyworks, an online broker with hundreds of thousands of clients. “Every time you hit record levels, people think when the shoe is going to drop.”

While the S&P 500 has advanced more than 27% this year, setting a new record Monday, those gains have not been evenly distributed and many investors who stepped in to buy on the dips have not been rewarded.

More than 200 of the companies within the benchmark US equities index are down at least 10% from recent highs, with about 90 of these companies S&P 500with at least one 20%. That has been a signal to some traders that the “everything rally” is not as long-lasting as many of the benchmark indices have made it seem.

Many of the action memes that soared into the stratosphere have also begun to return to earth, including recent declines in GameStop and AMC.

“Clients made a ton of money buying and speculating over the last year or two and now that doesn’t work anymore,” he said. Henry Schwartz, head of product intelligence for the owner of the Cboe exchange. “How many clients can successfully switch to strategies that work well in a bearish or sideways market?”

Goldman Sachs strategist Vishal Vivek, noted that the trading of individual stock put options reached a record of $ 353 billion on December 3 and that daily average volume negotiation of $ 233 billion in November it was an all-time high. Vivek added that the December average daily sales volume of $ 217 billion it remained high “despite a decline in individual stock options.”

There are indications that some of the purchases are coming from retail investors. An increasing number of small options trades, which investors have used as an indicator of retail investor activity, have been for these new sales contracts. Jason Goepfert of SentimenTrader estimates that approximately 23% of new contracts of retail options open in the week ending December 17 were for put options, in front of 16% at the beginning of November.

Brings activity more in line with the way investors used derivatives before the rise of many meme actions this year, when many new daily traders had bet that stocks could only go up.

“It’s a flexibility that people don’t think the retail investor has,” he said. Peter van Dooijeweert, options specialist at hedge fund Man Group. “They think of retail as a knee-jerk buyer’s buy in for dip calls. But we are seeing that sophistication. “

Van Dooijeweert added that it was not simply a question of retail investors turning to options. The managers of large capitals They have also been inclined to put up contracts, using them to hedge their portfolios rather than Treasuries, given that US government debt has little room to recover in the event of a stock market crash.

The number of pending sales contracts has increased by more than 25% from the end of 2019, according to data from Cboe Global Markets y OptionMetrics. And there is a feeling that even new retail investors aren’t exhibiting some of their old habits. When buying call options, the swarm of retail investors often opened and closed options trades the same day, in an attempt to profit from option price changes rather than performing a long-term purchase on the movement of the underlying shares.

While that has been partially true on the selling side, strategists and traders said there were signs that they were also using the sell side. put options in the most traditional sense: holding put options to guard against a sell-off.

“This market is killing me,” wrote the user of Reddit ColdDonkey4784 on the message board WallStreetBets. In a discussion of how to profit, sometimes called “chicken bids”, using options trading, the person said, “I am a bull by nature. But I am happy to buy put options.”

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