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Matrix Level IV
One of the reasons it is such a joy for us to run our business here at Cestrian Capital Research, Inc is that there is a never-ending number of layers of onion to peel back as regards understanding securities markets. We are literally never, ever, ever bored and we never stop learning.
Now as regards that onion - you can take two views of what you find with each Grand Reveal.
If you like, you can decide that each layer is more putrid than the next, not at all what you were taught in Capital Markets 101 about earnings and dilution and all that. You can yearn for a Dreamtime that never did exist where once stock prices were rational, based on earnings and dividend yields and the leverage through the preferreds and blah. And you can complain every time stocks don't behave the way they should. Bah humbug!
This is insanity of course. Because stocks never were valued this way and never will be. This is merely a retrofitted logic to give us all the comfort of a system to believe in - which somehow a lot of people still believe in despite overwhelming evidence to the contrary. It's not even a comfort, because if you run your money this way you will only ever be disappointed with the outcomes.
Better to take the blue pill - or is it the red pill, we don't recall, it's almost a vintage movie now - and realize that stock prices are merely a consequence of the various motive forces acting upon them. Earnings? Sure, that's one of the forces. But others are stronger. Sentiment? Yup. Sector rotation, otherwise known as The Art Of Creating Money From Thin Air? Yup. But there's a big hidden force too, of gravity-wave proportions.
The Dark Arts.
The options market.
In Capital Markets 101 the professor will treat options with a certain fascinated disdain. Stocks? Like a glass of wine. Good people own them, use them, trade them. Options? Methamphetamine. For urchins only. Can leave you with missing teeth if abused (when you have to sell the metal fillings to pay your margin call). Urgh, says the prof, whilst secretly setting up a snazzy directionless options trade beneath the desk.
Here's the thing. Keep drinking the good Bordeaux if you want. But if you want to understand equities pricing you have to understand how the options market drives it. Want to know why the market rocketed up in October? Because the last day of September was Q3 options expiry and you couple that with a handful of other factors and, WHOMP, up goes the market these last two days, causing general disgust amongst the chattering classes everywhere. But if the cafe-dwellers had follow opex dates and put/call balances they would have known to expect this reaction (maybe not the amplitude but definitely the direction).
And if you want to understand how options impact stocks? Read on. What follows is, strictly, for our paying subscribers. But - don’t tell anyone! - we have a free trial offer on right now, so you can get the good stuff for nothing. If you’ve yet to take your free trial? You can sign up right here: