Stocks that trade options

This contract gives the buyer the right — but not the obligation — to buy a stock at a given price at some point in the future. If the share price is higher on that date, the buyer can purchase the shares using the contract, then sell them for a profit. But just as the buyer stands to benefit from a rising share price, the dealer who sold the contract stands to lose. Brokerage firms make money by charging fees on products, not by predicting where share prices go.

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So to hedge their risk on a given contract, they buy a calculated percentage of the stock they would be forced to sell if the buyer ended up making money on the bet. But as the stock prices rise, brokers must buy more shares to keep their hedges in balance. And buying more shares helps push share prices up.

Gallen in Switzerland, who recently co-wrote a paper that analyzed the relationship between the options markets and market volatility. The result can be an options market that itself has become a generator of share-price momentum and stocks that appear increasingly untethered from bedrock fundamentals, like expectations for corporate earnings.

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The overwhelming optimism of stock options investors — and the chance that they are fueling a feedback loop of ever-escalating stock prices — is one of the reasons some analysts are concerned that a bubble might be building in the market. If history is any guide, such bubbles tend not to last.

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The frenzy back in was followed by a roughly two-and-a-half-year downturn as the stock market plunged 40 percent. In August, the put-call ratio tilted hard as bullishness took hold. Sosnick said. But for now there are few indications that investors have had their fill. Since the sharp setback for tech stocks in September, retail traders have redoubled their interest in buying single-stock options, which have become especially popular among online amateurs who gather on Reddit and Discord to swap ideas and fawn over screenshots of both purported wins and gut-wrenching losses.

The momentum will probably last until markets turn down and these newly minted traders experience painful losses that, for many, will be the first in what has been an extremely short investing career. McElligott asked. Today in Business. Stocks Stocks. Options Options. Futures Futures.

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