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Fly me to the moon...!
A tectonic shift in the options market suggests that big money is now chasing the rally higher. Now bears get a discount.
Be bullish.
That's the overarching message from the options market as it fills with talk of two major developments that suggest the stock market will keep rallying to new record highs.
Major hedge funds are reportedly buying, or have bought, massive amounts of Standard & Poor's 500 index calls in the over-the-counter options market. The calls would increase in value if the index, now at about 1,664, rises to 1,725 by year's end. The funds reportedly missed the stock market's rally and are playing a vicious game of catch-up.
Though it is difficult, if not impossible, to peine the veil of secrecy that surrounds the OTC markets, evidence in the listed options market suggests investors are clamoring to buy bullish calls.
The CBOE Volatility Index (VIX), which should decline when stock prices rise, is increasing. Traders said the unusual behavior means that the banks selling OTC calls to big hedge funds are buying the VIX to hedge their positions.
Also, evidence suggests that big funds are not alone in making bullish bets in the options market.
The implied volatility of August calls on the S&P 500 – essentially the options market's expectation that a security's price will change – has sharply increased since March.
At the end of the first quarter, investors could buy bullish S&P 500 calls without paying a greed premium because expectations were low that the stock market would advance. Now, the price of August calls on the S&P has surged by as much as 100% by some measurements, according to one strategist.
The change in options market pricing dynamics is a big development. Since the 2007 financial crisis, bearish puts have largely been more expensive than bullish calls, reflecting investor antiestéticar about the future of the stock market. The fact that the implied volatility of calls is now increasingly more expensive than puts is a milestone in the stock market's recovery from its crisis lows.
The idea that the stock market will continue to advance is more than a reflection of options trading patterns. Goldman Sachs' portfolio strategists Tuesday raised their 2013 target price for the S&P 500 to 1,750, from 1,625, as the economy improves faster than expected, and companies increase their dividend payouts. The strategists, David Kostin and Stuart Kaiser, expect the index will rise to 1,900 for 2014, and 2,100 for 2015.
It may be hard to find any real bullish bargains in the options market, but there is some residual comfort in buying calls that cost a fraction of the price of the associated stocks and indexes at a time when most everything under the sun seems to be trading at, or near, record high prices.
---------- Post added 22-may-2013 at 00:14 ----------
Por cierto, que Goldman Sachs tambien vaticina que el techo de deuda de esta semana no va a ser problema. Pero el de Agosto... va a ser MUY complicado...
Por cierto, (y van dos) en Irán la están vistiendo... no le quiten ojo...
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