Options Traders Are Preparing for a Market Decline
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What is the main topic discussed in this episode?
Here's your money briefing for Thursday, December 19th. I'm J.R. Whalen at The Wall Street Journal in New York.
Why are options traders preparing for a market pullback despite record highs?
The Santa Claus rally is in full force on Wall Street, but many investors are prepared for what they see as an inevitable pullback. Wall Street Journal reporter Gunjan Banerjee will explain how options traders are prepared and they're spending billions to hedge against a market decline. First, some money in market news you should know. Cyber attacks over the summer targeted the payment systems on gas pumps in an attempt to gather personal data. And Visa sees that as enough of a threat.
What recent payment system cyberattacks should consumers know about and how can they protect themselves?
It issued a warning to merchants and the public. It says hackers exploited network weaknesses along the payment network. Now, the Consumer Federation of America says there isn't a way for consumers to spot and avoid compromised gas pumps, but drivers can always use cash to avoid risk. Plus, it's a good idea to check your credit card statement daily for unauthorized activity.
The S&P 500 is up more than 25% this year, and U.S. markets are closing out 2019, hitting new records. But what if that run came to a halt? Options traders are playing the market with that scenario in mind, and Wall Street Journal reporter Gunjan Banerjee is here to explain. So Gunjan, let me play the market optimist here. We're hitting fresh records at least once a week, it seems.
Which historical market events make investors worry about a repeat decline in late 2020?
What could possibly go wrong?
That's a really interesting question. And that's what a lot of people are wondering right now. You are seeing fresh records hit day after day. But I think some investors are concerned that we could see a redo of 2018. And what happened in 2018 was... The S&P 500 was ascending through September, and then it started to tumble in the fourth quarter. And major indexes ended up in negative territory for the year. So some people are wary of a redo there. And then, you know, next year we have a presidential election. So some investors are also viewing that as a potential source of volatility and looking to hedge their portfolios.
So the election is at the top of their list.
Exactly, yes.
What do option traders see that a lot of other folks on Wall Street do not? Aside from the election, what do they think could be potentially pulling the markets down in 2020?
How are options traders using hedges to protect portfolios ahead of the presidential election?
Options traders, they can use these types of contracts to make directional bets and profit from a quick rise or fall in the stock market. Or they can use these types of contracts to hedge their portfolios. So many investors are also looking to the latter. You know, we've seen these tremendous gains in the stock market. Let's try to make sure that we're protected against potential losses. And as you mentioned, the election could be one source of volatility. Some investors are closely watching who the final Democratic nominee will be for the U.S. presidential election, and especially that nominee's stances toward business.
And the amount of trades by option traders to protect themselves against a fall, that block, that amount of trades is actually fairly high.
So what we're seeing is that the cost of such protection, the cost of these hedges, in the options market is increasing. So that tells us that there's more demand for these bearish options that would protect investors from potential losses in their portfolio.
What signs in the options market indicate increased demand for bearish protection and who is making large bets?
And options traders closely watch a measure that gauges, you know, how expensive are these bearish options relative to the bullish options. And the cost of bearish options relative to bullish options is elevated at the moment.
And there's some very prominent investors that have joined this trade in a big way.
So the Wall Street Journal reported that Bridgewater, one of the biggest hedge funds in the world, has also put on a very large options trade that would profit if the S&P 500 fell by March.
So have you seen this options trading, this hedge against a decline in the markets? Has this been building up as the year has gone on? Or are we seeing this triggered in just the fourth quarter?
You know, there hasn't been a definitive trend, but I've definitely been hearing more from investors lately that there seems to be more demand for hedges in the options market lately.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–0:11
2
Why are options traders preparing for a market pullback despite record highs?
0:11–0:40
3
What recent payment system cyberattacks should consumers know about and how can they protect themselves?
0:40–1:33
4
Which historical market events make investors worry about a repeat decline in late 2020?
1:33–2:25
5
How are options traders using hedges to protect portfolios ahead of the presidential election?
2:25–3:27
6
What signs in the options market indicate increased demand for bearish protection and who is making large bets?
3:27–5:13
7
Can options hedges profit if markets keep rising and what are the costs and risks of those strategies?
5:13–5:26
Speakers
2 identifiedMore from WSJ Your Money Briefing
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