Wednesday, July 19, 2006

What Options Are Telling Me

By John Succo

I am pretty busy selling deltas (stock) up here against our positions. Wells Fargo (WFC) has rallied 3.3% today yet they crush volatility in option prices. This is a major move in stock and the reaction of people always amazes me. But it is really due to call selling from overwriters.

Just like a major increase in option prices tend to make markets rally (as explained), a crush in volatility sets up the market to fall back. Again, much of this rally is due to a sort of short covering where those long expensive puts panic and "puke" them out.

And it starts over and over again, a process that tells a lot if you look between the lines. Options are telling me that people are now more worried about missing a rally than anything.

All this in a backdrop where central banks are more...

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