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Why Are Traders Buying So Many Puts? |
| Investors use options to reduce risk as much as they do to make profits
Investors, especially institutional investors tend to use options as a way to control risk as much as a way to speculate and make profits. In particular, put options are a very effective form of "insurance" against downside movement in the market. Right now, investors are buying almost 50% more puts on the market indexes, such as the S&P 500 (.INX) and the Dow Jones Industrial Average (.DJI), than call options. This is a bearish sign. The put/call ratio has not been as high as it is right now since August 6th when the stock market started consolidating at the S&P 500's resistance level of 1,000.
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Essential Reading for Traders
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| | | | | Buying a put gives you the right to sell a stock or ETF at a specific price in the future. If you owned a stock and bought a put you are essentially buying the ability to sell the stock for the put's strike price no matter how far it may drop.
Buying put options as insurance is expensive but if the upside potential of the stocks you own is greater than the put's premium then it may be worth it as a way to prevent large losses if the stock suddenly declined. As you can imagine, when traders start buying more puts than calls they are probably concerned that insurance against the downside is necessary. You can learn more about using options to control risk as well as make profits through the links below.
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