Many options traders have been diligently studying sector focused exchange traded funds (ETFs) to determine whether the recent rally in the markets is over or still has some more steam.
Based on options trading, most observers would rather see traders selling puts rather than buying calls. The reason behind this is that put sales represent a willingness to assume some risk and actually buy securities close to their market value, whereas buying calls indicates that one is taking a bet that something will advance, states Steven Sears of Barron’s.
Traders are watching these patterns very closely to get a sense of how investors are thinking. Based on this trading on some sector ETFs, some traders think that the rally has some steam in certain sectors, but not in others.
This doesn’t mean that this strategy is foolproof, as almost nothing is. While some investors might find that watching options activity is a good way to spot coming trends, an easier way to spy opportunities is by watching trends and waiting for them to cross their 200-day moving averages before considering a position.
Kevin Grewal contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.