How Stock Options Could Trigger The Next Market Meltdown
A jolted sentiment could undo market gains
Investors are rightfully focused on the trade war between China and the U.S., but almost everyone is unaware of conditions deep within the options market that could send stock prices sharply lower if something happens to jolt sentiment.
Each month, hedge funds and other institutional investors sell S&P 500 index put and call options that are 3 percent to 5 percent below and above the index’s actual market level. The strategy bets that the stock market will trade up or down in a relatively narrow range over the next 30 days. If this proves true, the investors collect a hefty amount of money. If they are wrong, chaos could ensue.
The monthly index options selling strategies are thought to be the equivalent of about $100 billion worth of stock. They work like magic as long as the stock market remains within the range that these investors have defined with their short puts and calls.
Please select this link to read the complete article from Barron's.