Options Video Clip

Posted on April 2nd, 2013

I love seeing mainstream television talking about options and hedging. Here’s a clip off of CNBC yesterday that I think is worth watching.
Although using put spreads as a hedging tactic isn’t one we use very often, it is a viable near-level approach to make money on a downswing.  In larger corrections, however, it provides limited protection. Nonetheless, the video hits on some of the themes we discuss.

In the video Amy Wu talks about skew, so we thought we’d explain quickly what that is. Skew is the price difference in the extrinsic value of call and puts at the same strike levels and is a way of assessing demand between calls and puts. When puts are “skewed” higher it indicates that there is more of a demand for them and prices are higher. That is typically a bearish signal. However, we’ve been skewed to the put side for months now and the market has pushed up through it. It is a data point we watch, but don’t use so we hardly ever talk about as it is more relevant to speculating than hedging.

In truth, there's some misunderstanding of the options market by the CNBC anchor. It is unfortunate that she mispoke when she said protection is getting expensive. That’s just not true as we've been documenting for the last 6 months. Sorry, Sue. However, we applaud you for bringing up the topic. Let’s hope news channels continue to teach and expose viewers to hedging and how options can be used for more than just speculation. 

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