Hedge Funds Options ETFs

Hedge Funds Options ETFs

Hedge Funds Buy Options on Exchange Traded Funds

It sounds counter-intuitive, but hedge funds buying up bearish options may be a signal that stocks are going to rally in the near future. According to technical analysis from Bloomberg, the fact that hedge funds are buying bearish options on exchange traded funds to shore up their positions is a sign that stocks could rally.
Since mid-September, the ratio of bought-to-open puts versus bought-to-open calls has been increasing on major ETFs, such as the SPDR S&P 500 ETF Trust, the PowerShares QQQ and the iShares Russell 2000 Index Fund, Salamone said. The increase in that ratio indicates that hedge funds may be boosting their long positions in the ETFs, because they could use the puts to protect them in case of declines.

“What that translates into is since these equity buyers are protected, they are less likely to panic on bad news,” Salamone, vice president of research at Schaeffer’s said in a telephone interview from Cincinnati. “When hedged hands are accumulating stocks, rallies tend to occur, and any selloffs tend to be modest given that they have put protection in place.”

The Standard & Poor’s 500 Index slumped as much as 16 percent from a 19-month high in April on concern about an economic slowdown. The U.S. equity benchmark is once again near its 2010 highs after falling to this year’s low in July, as companies reported better-than-estimated earnings and the Federal Reserve indicated that it will buy bonds to stimulate the economy. Source

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