Girding for a Shaky Autumn (professional investors fret about a market pullback this fall)

Barron's ^ | 9/4/2009 | Steven Sears

[SeekAndFind]

TALK IS CHEAP. Trading index options is usually not.

As pundits everywhere debate about the trajectory of the economic recovery, investors are laying out big dollars to buy defensive index options.

If the global and U.S. economies recover in the shape of a V -- down fast, up fast -- the hedges will probably ultimately function as emblems of balancing risk and reward.

If the economies follow a W-shaped recovery -- a view espoused by the famous hedge-fund manager, Paul Tudor Jones, and Bill Gross, the bond maven -- the hedges will offset stock losses from another sharp drop in the stock market.

To be sure, the shape of the economic recovery remains one of the most fiercely debated topics on Wall Street. Major investment banks, like Goldman Sachs, believe the economy is on the mend, and the stock market will advance through year's end. Many Wall Street pundits expect the Standard & Poor's 500, hovering around 997 as of midday Thursday, will be trading at about 1060 by year's end.

Yet, many prominent investors who are part of the Street's buy-side community (includes institutional investors who do not work at banks) are less optimistic about the future than the sell-side crowd. Moreover, September and October are typically the most volatile months of the trading calendar, which only further spooks investors.

All these differing opinions coalesce in plain view in the options market. Investors digest these differing views, examine their own risk parameters, and make their way to the screaming chaos of index options trading pits.

Think of index options trading as the purview of grown-ups with serious problems. Unlike equity options, which are often used for tactical applications like speculating on earnings or increasing yields of moribund stocks, index options users tend to be managers of big stock portfolios.

[The_Media_never_lie]

If everyone is fretting about a pullback, there won’t be one.

[paul in cape]

I pulled out about a month ago, and am in an all cash position (OK, I still have some AAPLE left... people want their toys.)

[Sig Sauer P220]

I pulled out about a month ago, and am in an all cash position (OK, I still have some AAPLE left... people want their toys.)

Thats for sure. I volunteer at a soup kitchen kind of place for the homeless, and people coming in for meals have bluetooths, cell phones and blackberries. They won't give those things up.

[reed13]

I’ve done the same thing - but for me it’s MO - people want their cigs and such, and I just couldn’t pass on the dividend.