Buying Put Options as Protection against Omicron Amid Divergence

30 thg 12, 2021

Omicron continues to amaze with the speed and scale of its spread. The numbers are really terrifying. In Europe, the number of cases has increased by more than 50% in just a week (in America, the figure is about 30%). As a result, the number of new cases in France is already under 200K (almost three times higher than a couple of weeks ago). A similar figure (180K) in the UK. The United States has approached the 500K mark (a new absolute record) and it is likely that already at the start of 2022, after the successfully celebrated Christmas, the country will exceed the previously unthinkable number of one million new cases of the disease per day.

In this light, as well as in anticipation of a tightening of the Fed's monetary policy, more and more traders are trying to at least partially insure themselves against a possible fall in the US stock market. That is, it has not yet come to open massive sales, but put options are flying like hot cakes. SentimenTrader estimates that in the week ended December 17, approximately 23% of new retail options were put contracts, up from 16% in early November.

It should be noted that 2021 was a record year for the options market. On average, 39 million options contracts were traded daily this year, up 35% from 2020. At the same time, retail investors account for 25% of all trading activity. Which only confirms the idea expressed in yesterday's review.

In general, summing up the results of 2021, let us once again note their ambiguity. That is, on the one hand, this is a super successful year for risky assets. The S&P 500 Index added almost 30%, which is a lot. But at the same time, 40% of the companies included in the index not only did not grow, but generally decreased in price by a two-digit amount, and a good half of these two hundred companies lost over 20%. We have already written about Katie Woods and her “successes” in 2021. That is, growth cannot be called uncontested. Such divergences are a sign of internal market weakness. So in 2022, despite the rally of Santa Claus, we prefer to enter not with long, but short positions in the US stock market.