MSN Money is reporting that investors are paying out to insure against a possible US stock market crash. The spread between the cost of put and call options on the S&P500 has hit its highest level since 2001, indicating that investors are taking precautions against a market decline.
A put gives the purchaser the opportunity to insure against a fall in the market and is the option but not the obligation to sell shares at a specified price and date in the future. A call gives you the right but not the obligation to buy shares, allowing the buyer to position himself in case of a market rise.
It seems that not everyone is drinking the Kool-Aid. When your own money at stake, you have to stop and think for a moment when the markets reach record highs, especially when there’s a lot of talk about economic slowdown and less consumer spending.
William Strazzullo, chief market strategist at BellCurve Trading, said the stock market stood at a crucial juncture with the Dow Jones Industrial Average and the S&P 500 both hitting new highs on Thursday.
“In spite of the talk of recession and less consumer spending, we are back at record highs,” said Mr Strazzullo. “To sit up here is bullish and the clock is ticking for shorts. Either we roll over or set the stage for a bigger push higher.”
Todd Salamone, senior vice-president at Schaeffer’s Investment Research, said: “Everyone is expecting a huge decline.”
But Mr Salamone disputed that a crash was imminent. In 2001, put options became more expensive because the market was already falling, he said, while today, hedge funds were buying large volumes of puts to protect their long positions.
A crash may or may not be imminent, and any single economic factor such as reduced consumer spending is unlikely to make a difference. It’s difficult to predict markets, however those who do stand to make a nice profit.
The market in the US is certainly going down. Right now there’s still easy credit and a lot of money floating around and people don’t know of anywhere else to put it but the stock market. The smart investors have already cashed out of real estate holdings and that money is being pumped into the stock market.
I think it’ll still be a while before anyone really starts to realize what is going on, and by the time your average joe realizes what’s going on it’ll be too late. Save your money, pay off your debts, and live within your means and you’ll be fine. Money is overrated - go do something free like taking a hike or enjoying time hanging out with your family!