WSJ: The invisible forces exacerbating market swings

Sharing this article because it’s a very good high level view on the behavior of markets over the past 2 years.

The TLDR is that options activity has become more and more prevalent in markets. This is caused by search for alternative strategies to increase yield in a very low yield world.

The problem of course is that this leads to more dramatic shifts in market behavior in shifting from low volatility grinding higher “ignoring” bad news to sudden volatility shocks as market makers get forced to hedge their short put positions by selling (shorting) equity positions.

This is the basic reason why markets seemed to not be reacting at all to coronavirus fears through most of February, only to see a sudden shock downward as the market moved enough to force this shift in behavior.


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