Finance 0

Should You Place Call Or Put Options On The S&P 500 Index?

By Kurt Osterberg · On January 31, 2016

The S&P 500 Index (SPY) has suffered agonizing declines in 2016. As you can see from the above graphic, it plunged from approximately 2,080 to its current level of 1,882.95, with no clear direction or consolidation taking place. In markets such as this one, one has to wonder what factors are at work here?

Broadly speaking, these are the elements at play:

Ongoing volatility in crude oil and commodities markets in general is having a devastating effect on major averages across the board. The Dow Jones Industrial Average (DIA), the Nasdaq 100 (QQQ) and the S&P 500 index are all moving in sync with the price of crude oil. A week ago crude oil rallied and then plunged, repeating much the same pattern in the fourth week of January. These sharp movements can be seen in the peaks and troughs on the respective indices.

On January 26/27, the Fed FOMC held a meeting to discuss interest rates. This is part and parcel of the series of meetings slated to take place in 2016. While very few analysts were expecting the Fed to announce an interest-rate hike now, there was significantly more interest in the Statement that followed the Fed meeting. Essentially, the Fed intimated in a cleverly worded statement that it would track the performance of the US economy and the global economy to warrant whether additional action would be necessary. However it indicated that it was on track to consider a gradual increase in interest rates throughout 2016.

Naturally, an interest-rate hike has negative implications for any equities markets. Since the cost of borrowed capital increases with a rate hike, the profitability of companies which rely on credit facilities is naturally diminished. As such, this is reflected in lower dividends and profitability and discounted future earnings in the present. This means that the price of companies’ stocks on indices like the S&P 500 index will naturally fall. It is interesting to point out that we have not seen as much movement in price when it comes to things like corporate earnings – oil prices and interest rates take precedence.