Options trading is growing at a healthy pace, as investors try to hedge their portfolios, even as the major indices trade at record highs.
Options have traditionally been used for individual stocks wherein you acquire the right to buy or sell a security at a set price, but more investors are now buying options on market indiices and ETFs to help balnce their portfolios should a broad market decline occur.
Here's a sampling of CNBC's coverage this week.
Options Explosion
David Kalti, OptionsXpress CEO, and Dennis Davitti, Credit Suisse head of derivatives trading, discus the market's explosive growth with Sue Herera.
Options trading is up 25% in the first half of this year and Kalti's firm is among those benefitting from it. New acconts there are up 21%, as "average investors take their portfolikos into their own hands," says Kalti. The company is trying to "demystify" the concept and "customers are starting to get it."
Davitti says "increased volatility" partly explains the increase in trading, but also notes that hedge funds are seeking "more leverage." He says the last five years have been an excellent "environment" to sell options. "
Educating Customers
Lee Barba, INVESTools Chairman & CEO, tells Carl Quintanilla "we're seeing very active traders, who are comfortable and taking part of market volatility."
INVESTools, founded in 1983, offers investor education, trading and investing courses for average investors. It recently merged with Think or Swim, an online trading platform.
Barba about $175 million of INVESTools's $250 million in sales is options related.
Nasdaq In Focus
Stacey Briere Gilbert, chief options strategist at Susquehanna Financial Group , tells Sue Herera that investors are looking mainly at M&A activity and earnings in Nasdaq shares.
Although the Nasdaq is not approaching record highs like the Dow 30 or S&P 500, investors are bullishly buying Nasdaq's volatility because "when it moves, it can move a lot."
Put-Call Ratio
Chris Welsh, managing director of Mako Group, tells Steve Sedgwick that options bets for a decline in the S&P 500 outnumber those for a rise in the blue-chip index.
When the put-call ratio, which measures trading volume in put options versus that of call options -- is high, it generally suggests a strong bearish sentiment and a market decline.
Welsh says that by his reckoning the current situation is less a case of outright "directional bets" but "more sophisticated use" by smart money players, looking to smooth returns as well as some protection during the summer months, even though investor sentiment remains relatively bullish.
"Naked" Puts
Mohammed Hadi of Dow Jones Newswires and William Lefkowitz, vFinance Investments discussing the strategy of placing put options on companies that have agreed to buyouts with CNBC's Melissa Francis.
Lefkowwitz says Harrah's Entertainment and Clear Channel Communications are attractive possibilities
At the least, Hadi says investors must be prepared to own the stock at the put price. which is where thew risk comes in, if the stock price falls below the put.