U.S. options traders think we’re in for a crash

U.S. options traders think we’re in for a crash. Options traders are becoming increasingly nervous about the U.S. stock market’s record-setting rally of late. In fact, they are paying the most ever to protect against an S&P swoon – as per data compiled by Morgan Stanley. The gap between the price of the put options and the cost to wager on further gains has averaged about eight percentage points since August. That’s more than the previous high in July 2001, before the index dropped 34%, and swooned to its lowest level this decade.
It looks like traders aren’t taking any chances this time around. They are pricing in the highest risk of an equity market decline, since the technology-stock bubble at the start of the decade – again, this from Morgan Stanley. According to that source, implied volatility is suggesting that many traders are betting on stocks falling. That measure calculates expected price swings of an underlying asset, and is used as a barometer for options prices. July 2001 was the last time the skew steepened as much. In the ensuing 15 months, the U.S. economy suffered its first recession in a decade, and the S&P 500 fell accordingly.
Source: National Post/Financial Post – Bloomberg News, Tue., Oct. 9/07