On a percentage basis, this May was the worst-performing month since 1962. Volatility really began to pick up around April 27 and exploded on May 6, with the so-called “flash crash.” Many long side investors were “stopped out” that day, possibly at prices that were far below where their actual stop loss orders were, due to the speed at which the market moved.
The S&P 500 Index’s high this year (hit in late April) was 1,219; this is a level the index had not seen since September 2008. While the past year has been good for the S&P, what took months to gain was given back in about 40 days (and for some, in a single day).
A friend of mine, Alan Knuckman, was on CNBC on Friday making the point that traders and investors could use options as a stop loss. Melissa Lee, who agreed that options can be used in this manner, has spent the past year as host of “Options Action” and “Fast Money” on CNBC. Perhaps she has developed not only a knowledge of options, but perhaps a reverence for the derivative. Alan and Melissa do not represent the majority, as options knowledge still remains relatively specialized. The space is growing, however, and education, trading tools, and options volume in general is proliferating.
But for many investors, options – with their foreign nomenclature and seemingly odd behavior and risky reputation – are still not utilized in most accounts. Part of my goal of this column is to unravel some of the mystery surrounding options trading. (more…)
