03.15.2012

Options In Play

03.15.2012

The recent rally in U.S. equities has been attributed to many a factor. But the truth is, the catalyst behind the rally is essentially irrelevant now that the market is in non-stop buying mode. The institutional crowd has no choice but to push it higher in order to appease customers and investors.

“Think about Apple and the rise it has been on,” one proprietary options trader told Markets Media. “This stock keeps going up and there appears to be no end to it. People look at the stock and think ‘There has to be an end to this. It’s eventually got to reverse the trend.’ But it’s not. The mutual funds, the Fidelitys and the Vanguards of the world, hold a ton of Apple in their funds and keep bidding the price higher and higher.”

With stocks going higher, they’re becoming increasingly more expensive – not in terms of P/E ratios but actual market price – for investors both retail and institutional. As a result, equity options have become an attractive alternative to those who want exposure to large cap or big hitter technology names without allocating a lion’s share of capital up front.

The increased interest in options has been clearly reflected in rising daily volumes. For instance, March 12th showed total option contract volume of 15.98 million according to the OCC. By March 14th, that number had spiked to 20.44 million.

“A lot of the prop guys we deal with aren’t standing on the sidelines anymore. Their MDs are telling them to increase their trades and to take advantage of the volume that’s been coming into the options space,” said one broker-dealer specializing in options execution. “They know they can make profits here trading the [options] ladder on certain names. No one cares about equities anymore.”

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