Displaying items by tag: options

Nvidia's stock surge has had an outsized influence on the S&P 500 this year, accounting for nearly a quarter of the index's 17% gain. The company's 140% rise, driven by strong demand for its AI chips, has been a key market driver, with a single-day 8.2% rally lifting the S&P 500 to its biggest gain in almost two years. 

Investors are concerned that a downturn in Nvidia could drag the broader market down, as the index has struggled to rise on days when the chipmaker's shares decline. 

Nvidia’s dominance in the options market, where it accounts for up to 30% of daily stock options volume, has further amplified its stock movements. Analysts warn that if demand for Nvidia's products weakens, it could trigger a broader market sell-off.

Finsum: Investors need to consider how options plays can lead to better outcomes for their portfolios, and situational plays that compliment their current book.

(New York)

Momentum funds often get bad press. While they have obvious utility, a lot of people say they feed bubbles and are subject to very big losses from market corrections. That said, some funds have started to do an excellent job at both hedging and outperforming to the upside. While that might sound impossible, it is not as hard as it sounds. The key is to follow the market’s movement, but not try to predict it. In other words, in strongly upward markets, you position yourself very bullish (e.g. 200% exposure). In downward markets, you take an inverse or short exposure to profit from losses. In a decent market you simply stay at 100% long exposure. By using this approach you can participate it more of the upside and lose less on the downside.

FINSUM: This is a smart strategy and one that some momentum funds are using to outperform the market right now. It can be employed either by buying funds or with an options strategy.

(New York)

Covered calls are an old investing methodology, but one that does not get much attention. That said, employing covered calls can be a great income strategy. So what is a covered call? Simply put, it is the process of selling call options while simultaneously holding the underlying shares. The idea is to earn income from selling the call options, while hedging risk by holding the underlying shares. The ideal outcome is that the underlying share price rises but does not hit its strike price, yielding the seller both the income from selling the option and the capital appreciation of the shares.

FINSUM: In markets with big momentum this is not a great strategy, but in back and forth ones like those at present, it can be very effective for increasing income. There are a number of funds that also employ this strategy so you don’t have to do it manually.

(New York)

The market is right around all time highs and economic and earnings figures are healthy, all signs that the market is headed higher. That said, prices could take a dip at any time and many are worried about a reversal. Some are particularly worried about funds having to sell stocks to rebalance their holdings of equities versus bonds (which have performed poorly of late). So how can one profit from a market fall? Here is a good options strategy for doing so: buy S&P 500 put options at $287 and simultaneously sell $285 put options, both of which expire May 3rd. The market volatility has been low, so the options are cheap, and the spread strategy limits losses.

FINSUM: If you are just playing for volatility based on a likely rough month-end rebalancing, then this could be a good strategy.

(Chicago)

There has been a lot of consternation over the last week about whether the Vix is being manipulated. In one incident last week, the Vix jumped significantly with no corresponding move in the stock market. The culprit apparently was a large options trade deeply out the money which shocked the benchmark. Following an investigation, the Cboe says that it was not market manipulation, but rather an order imbalance that caused the jump in the VIx’s measure. Speaking on whether the move amounted to market manipulation, the Cboe commented that “We reiterate that we believe these claims are without merit”.

FINSUM: Whether or not the market was being gamed, the bigger question is whether the the way the Vix is calculated is too fragile/sensitive. If a single trader with a moderately sized order can move the Vix this much, what does it say about the index?