Options Traders Keep "Opting" for Even Higher Stock Market Prices
Stock-Markets / Stock Markets 2020 Sep 08, 2020 - 06:51 PM GMTBy: EWI
And this continued bullish behavior speaks volumes about the trend
What a rally!
After a swift and scary ride downward, the DJIA has climbed from a low of 18,213 on March 23 to near-record high territory.
Even so, many investors are still bullish, and they're backing up their conviction with a great enthusiasm for call options, which are bets on higher prices. (By contrast, as you probably know, put options are placed when market participants expect lower prices.)
This enthusiasm for call options has been on display for at least a couple of months now.
Let's go back to these two charts and commentary from our July Elliott Wave Financial Forecast, a monthly publication which provides analysis and forecasts for major U.S. financial markets:
[Looking at the chart on the left], the Dow declined over 38% to March 23, the fastest decline from an all-time high on record. The week of June 12, small trader call buying surged. ... At 52% of volume, the percentage of small trader call buying equaled the record of April 2000, which was the forefront of a 2½-year bear market. In dollar terms, the speculation this year is far higher than it was in 2000. The chart on the right shows that the total number of small trader purchases of opening call options surged to 14.6 million contracts the week of June 12, more than nine times that of March 2000.
Small traders were not the only ones feverishly purchasing call options. During the same time frame, at just over 40%, the percentage of large-trader call-buying was the highest since March 2000.
Fast forward to an August 29 Marketwatch article headlined "Options bets that the stock market will continue to soar have exploded to dot-com bubble levels." Here's a quote:
Wall Street bets for further gains are around their highest levels since the dot-com bubble.
[The] appetite for calls, particularly among individual investors, has boomed.
So, it's notable that the big bets on call options have been remarkably persistent. It's what you could easily call "an extreme."
Yes, there's a chance that this "extreme" could become more extreme.
Yet, you are encouraged to learn what our analysts are saying about the stock market's price pattern.
You see, chart patterns repeat at all degrees of trend, hence, these patterns offer predictive value.
Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter, offers further insights:
Until a few years ago, the idea that market movements are self-similarly patterned was highly controversial, but recent scientific discoveries have established that self-similar pattern formation is a fundamental characteristic of complex systems, which include financial markets. Some such systems undergo "punctuated growth," that is, periods of growth alternating with phases of non-growth or decline, building into similar patterns of increasing size. Nature is replete with such "fractals."
Learn more about these Elliott wave patterns by reading the entirety of the online version of Elliott Wave Principle: Key to Market Behavior -- free.
The only requirement for free access to this Wall Street classic book is a Club EWI membership, which is also free and allows you access to a wealth of Elliott wave educational materials. Around 350,000 of your fellow traders and investors are already members.
Just follow this link: Elliott Wave Principle: Key to Market Behavior -- quick, unlimited and free access.
This article was syndicated by Elliott Wave International and was originally published under the headline Options Traders Keep "Opting" for Even Higher Stock Market Prices. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
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