Reactions of the options market to Fed moves were a mixed bag. While some of the well-known investment bankers concluded that the credit crunch was over, the options market manifested different reactions. The write up below unwinds certain facts about the US financial markets with more stress on the options market.
Reactions of the options market to Fed moves have been rather curious as well as mixed. As of September, 2007 it was observed that the Federal Government reduced rates by as much as 15%. As per reports of the Chicago Board Options Exchange Market Volatility Index or VIX, there was a total crash down on the volatility in the options market.
Names like Goldman Sachs, Bear Stearns, Morgan Stanley and Lehman Brothers are regarded as some of the biggest players of the financial markets. These companies adopted their own strategies to tame the credit crunch. Reports suggest that Lehman Brothers registered significant growth in the same fiscal year.
A representative of Lehman Brothers was found stating that the worst part of the credit crunch was over.
With regard to the options and the futures market, business as usual took place.
There was an over dominance of buy writing as well as over writing, stock hedging and portfolio hedging. However, what has been observed lately is that the traders are increasingly taking advantage of the price, which have elevated over the past months.
As a reaction to the moves of the federal government, the institutional traders are resorting to calendar spreads as well as bull spreads. However, not all institutional traders have resorted to these financial instruments. There are yet others who have indulged in i-bank stocks or implemented volatility trades. Volatility trade was conducted by disposing off options, which were very well priced and hedged them against priced options, which were inexpensive.
The statement made by the representative of Lehman Brothers (that the worst scenario of credit crunch is over) may not go down well with the traders of the options market. Following Federal government’s decision, the VIX registered a sharp decline. The market was still ascertained to be sufficiently volatile.
Last Updated on : 1st August 2013