In a sparkling stock market, this could be your best shot
It is one of the biggest legends in the market. Right before the crash of 1929, the stock market was in an epic bull market. Lower Manhattan was full of shops that allowed people to bet on rising stock prices as if they were betting on dogs, ponies, or boxing.
A shoe shiner tipped Joseph P. Kennedy, and Kennedy, thinking the market had gotten way too foamy, sold all of his inventory instead. Kennedy was out of the market when the crash ravaged America, securing a dynastic fortune that would help propel his son John F. Kennedy to the presidency.
Today, almost 100 years later, the conception of the market has apparently changed. The figurative heirs of the shoe shiner got rich by purchasing stocks, digital currencies and other risky assets. Anyone who worried too much missed it.
S&P 500 Index
has just reached an all-time high and activity has reached its peak. The options market, which allows investors to increase their stock market bets at a relatively low cost, has seen daily trading volumes increase to around 40 million contracts per day, up from perhaps one million in 2000.
Yet many investors are biting their nails. We don’t need to get into the usual risk narrative that begins with the expected end of the Federal Reserve’s easy money policies and ends with a global inflationary spiral. Instead, let’s focus on something that’s reasonably concrete: volatility and trading volumes in stocks and options.
When good times or bad times rock the markets, investors trade, which benefits brokerage firms, investment banks and others like them. Investors who wish to benefit from this could consider trading options on
Group of interactive brokers
shares (ticker: IBKR). Low-cost, technologically sophisticated brokerage is well positioned to take advantage of fluctuations in volatility.
The company just posted reasonably good third quarter results. Chairman and founder Thomas Peterffy told investors he believes the company can support 30% growth in new accounts. Piper Sandler analyst Rich Repetto, who has a buy rating on shares of Interactive Brokers, told clients the company was benefiting from the rate hike.
Intrigued investors may consider buying the January $ 80 call option from Interactive Brokers and selling the January $ 70 put option. This ârisk reversalâ strategy, ie buying a call and selling a put with a lower strike price, but a similar expiration, could be executed for a credit of. 75 cents when the stock was at $ 74.10.
If the Interactive Brokers share is at $ 85 at expiration, the call is worth $ 5. Short selling requires investors to buy the stock at $ 70 if the stock is at that price or less at expiration.
The January expiration will cover two meetings of the Fed’s interest rate setting committee, countless economic reports and many other events that could push markets up or down. If anything changed to scare or embolden investors, Interactive Brokers would likely benefit as well.
Over the past 52 weeks, the stock has fluctuated from $ 46.71 to $ 80.57. It is up about 22% this year.
There is a larger message from the options market worth noting. Stock prices can be high, but option premiums may not be as strong. The
Cboe volatility index,
or VIX, at 15, fell to its lowest level of the year despite all these looming risks.
Yes, a low VIX indicates investor complacency, but it also means options can be used to control stocks without paying a dramatic fear or greed premium – and it’s worth considering when. there is so much of each whirlwind.
Steven 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 underlying securities mentioned in this column.
E-mail: [email protected]