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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: russwinter who wrote (45204)11/9/2005 7:25:28 PM
From: ild  Read Replies (1) of 110194
 
<<<You will recall that by "structural put support" I mean the natural supportive buying that results from very heavy put selling at strikes below the current market price.>>>

I don't buy this Schaeffer's thesis. Puts sold short do not provide any support. On charts they look like support because they are sold at or below equity's support levels. Also options are zero sum game as for every put sold there is exactly the same put bought. As in futures, which are also zero sum game, we should try to look at how the smart money is positioned. Unfortunately there is no COT reports on options. My take is this: it used to be that the puts were sold by big, well capitalized houses. They were sold to mutual funds that wanted some downside protection. Now: as the market have been in trading range for long time numerous hedge funds developed strategies to sell volatility. I'd guess it would a part of some "market neutral" strategy where you long something, short something, short covered puts and calls and short some naked puts and calls. As the option premiums shrunk it requires more leverage to make the same return. So the probability that some not well capitalized but highly leveraged entity has made a wrong bet is higher than it used to be.
Many remember how much money DELL was making prior to 2000 by selling naked puts on its stock only to incur big losses later when the stock fell.
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