Options show us what the market prices in
In volatile market climates like what is being experienced today, there must be a good look at how wall street traders are pricing in the future movements of the indices. In this article I’ll be looking at the ETF DIA which tracks the movement of the Dow Jones Industrial Average.
Taking a look at the options for the Dow will allow us to view what traders perceive about the market. Considering that the opinion of the market plays an important role in how the market will perform going forward, we can extrapolate the numbers and see what traders are planning.
Looking at both the November puts and calls there is much that can be seen just from the closing prices of the options near strike price. Put options that value the DJIA at 8400 are trading at a 547 point drop, call options on the other hand are demanding a 653 point movement upward. Perhaps this should be viewed as traders are looking for a bottom, that investors think this market will turn around soon and move upward rather than down further.
Profit taking both yesterday and today from the Monday launch in price is likely weighing on the market as well as other factors including the 1.2% drop in retail sales numbers. But at some point this market has to bottom and be comfortable at a level where the valuations reflect on the true value of the corporations listed on the exchange.
From now on we’ll evaluate the option spread of calls and puts and decipher if the opinion of ETF options traders can pick the future movements. Within just a few weeks it should be possible to tell if the correlation between the spreads is any indication of future movement. As for now, the market is pricing in a move up rather than down.
