Fall in US stock options is evident as indices around the globe are dropping. The traders or the players of the stock markets are adopting a “protective approach” so that they do not lose out on their money. The article below reveals certain facts of the year 2007 when the movement of indexes in the stock market were very unpredictable.
Fall in US stock options indicate that the options market is not following the desired trend as expected by the players of the financial markets. It was observed that in the year 2001, the stock market boom had skyrocketed. However, owing to few scandals in quick succession in the corporate world, there was a backsliding for stock markets.
Two such instances were the accounting frauds at WorldCom Inc and Enron Corp. Following these incidents, the United States Securities and Exchange Commission conducted investigations of the probable manipulations in stock options.
Performance of S&P 500 index:
As of July 2007, it was estimated that the options market would drop by 5% to 10%. It was well realized by the traders of the stock market that “blowout earnings” were a far cry. Whereas the Standard & Poor 500 index was found to be 1,552.50, the Dow Jones index was found to be at a high of 13,907.25.
It was observed that number of contracts pertaining to puts as manifested on the S&P 500 index as well as the ETF or Exchange Traded Fund on the index was 10.4 million in the month of June, 2007.
It was found that the number of calls exceeded by 2.24 times. This was the highest since 1998 August. It was seen that there was a tendency of the investors in the options market to buy puts. This measure was adopted by many traders as a safety net to overcome the crisis since they had apprehended that the market would dip by as much as 5% to 10%. This was particularly correct for the real estate market.
US Subprime Crisis and ratings:
Owing to the subprime crisis, credit ratings of S&P were cut on a USD$6.39 billion pertaining to bonds, which were subprime mortgage backed. Fitch Ratings implied a cut of USD$7.1 billion pertaining to defaults in home loans and Moody’s Investors Service shed ratings on USD$5 billion subprime mortgage debts.