What is one of the causes of mind-numbing, portfolio-constricting stultification?
Welcome to the world of option premium selling. Activity in the options market gets translated almost immediately into price action (or as well soon see, price inaction) in the underlying stock or index. If investors rush to buy call options, this call buying is translated into stock buying as the other side of the trade hedges its exposure to a rally. And if investors rush to buy put options, this put buying is translated into shorting of stock as the other side of the trade hedges its exposure to a decline. If youre a momentum trader, you may look to trade in the direction of the option buying as long as you feel it will persist. If youre a contrarian, you may look to fade the option buyers if there are signs that the buying is about to peak. Regardless of how you play it, the fact is that option buying is consistent with movement in the underlying stock or index.
