Wednesday, June 9, 2010

Stock Options Shows Extreme Bearishness, Usually A Bullish Sign, But Roubini Warns of Major Risks

Something that we have noted is that put premiums are very expensive. Bloomberg confirms this in a report that says confidence in stock market has sunk to record lows.

Put options premiums that pay off if the benchmark index for U.S. stocks plunge more than 23 percent from its April high cost 75% more than calls. This is the biggest premium ever, according Bloomberg and OptionMetrics LLC.

"The 10-day average difference exceeded 50 percent 34 times since 1996. In those cases, the Standard & Poor’s 500 Index gained a median 7.2 percent in six months".

"When bearish puts cost 50% more than bullish calls, the S&P 500 rallied 28 times during the next six months and declined 6 times, according to OptionMetrics data going back to 1996 compiled by Bloomberg.

Roubini: Risks Very High

However, investors have a good reason to be buying puts. Nouriel Roubini says: “The tail risk of a significant stock market correction is very high now, thus the option prices correctly reflect the cost of hedging against” “Macro risks and financial risk are significantly rising.”

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