Stock Options in a Crisis

By www.Options-Trading-Education.com

 There always seems to be trouble in the
world and it invariably affects the stock
market.

http://www.options-trading-education.com/6616/stock-options-in-a-crisis/

 Many traders as well as long term
investors choose to use stock options in a
crisis situation.


 There are various options trading
strategies but the use of stock options in a
crisis is unique in that it can be both a
defensive and an opportunistic play.


 We do not have to look back all that far to
see an example of an externally caused
crisis that rocked the stock market.


 The September 11, 2001 attacks on the
World Trade Center Twin Towers and the
Pentagon


 as well as the failed attack on the US
Capitol Building brought not only a time of
crisis


 to the United States of America but also to
the capital markets of North America.


 The use of stock options in a crisis of the
proportions the September 11 attacks is
instructive for options traders.


 The attack on Pearl Harbor in 1941 was a
distant memory for many when terrorists
hijacked


 four aircraft and took down the twin towers
of the World Trade Center and attacked
the Pentagon.


 Before that the only attack by a foreign
power on US soil was in the War of 1812.


 Despite US involvement in two world wars,
the Korean and Vietnam conflicts, the Gulf
War and Panama Invasion, the US
homeland was considered inviolate.


 Then, just before markets opened in New
York, a plane crashed into the North Tower
of the World Trade Center.


 Both the NYSE and NASDAQ did not open
that morning and remained closed for four
days.


 The longest previous shutdown was in the
Great Depression in 1933.


 The NYSE composite index fell 7.1
percent, 684 points, when the market
reopened on September 17, 2001.


 At the end of the week the Dow Jones
Industrial Average had fallen 1,370 points.


 Just less than one and a half trillion dollars
in market value evaporated in the first five
days of trading after the September 11
attacks.


 With this bit of history as a backdrop let’s
look at stock options trading in a crisis.


 There was certainly good reason for panic
after a dramatic attack on the US
homeland and its financial center.


 There was good reason to sell off both
American and United Airlines as their
planes were hijacked and used in the
attacks.


 One might have been wise to wonder if the
airlines might be held negligent in the
matter of in flight security.


 AMR, American Airlines, lost thirty-nine
percent of its value and United lost forty-
two percent of its value when trading
reopened.


 The tourism and hospitality industries took
big hits. Insurance companies paid out
over forty billion dollars on claims.


 The flip side of these stock losses is that
defense stocks and companies that sell
services and weapon to the police saw
their stocks rise.


 Both put and call volume rose on the
CBOE with the use of stock options in a
crisis.


 Traders looked to protect against losses
and, in a period of uncertainty, to engage
in a profitable option trade or two.


 Those who expected to see stocks fall and
continue to fall purchased puts on stocks
that they owned and stocks that they did
not own.


 Those who expected to see stocks rise
immediately or to rebound later purchased
calls.


 Puts allow the options trader to sell a stock
at the contract price no matter how far it
falls and calls allow the options trader to
buy at the contract price no matter how
high it rises.


 Traders buy options to hedge risk and to
lock in gains.


 This is the gist of options trading and how
one uses stock options in a crisis.


 For more insights and useful information
about options and options trading, visit
www.Options-Trading-Education.com.


Stock Options in a Crisis

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