CHAPTER 11

Why Is Everyone Long Stock?

How to Use Options for a Hedge

As I watch all the equity options trades going across the tape for unusual options activity, I notice one common theme: It seems that many of these trades or traders are getting long stocks. There are many ways “paper” can get long. Let's define paper once again before we go forward. Paper is an order from a hedge fund, mutual fund, retail bank, or a big trader. Often, the number of calls outweighs the number of puts, and most often, calls that are being bought outweigh calls being sold. The reason for this is simple: Many hedge funds, mutual funds, and traders only know how to trade one way, and that is to the long side. Hedge funds run many different trading styles, but many of them are long only, because that is what their customers want and that is how the history of the stock market has been in order to perform. Almost every single person in the United States is long stocks in some form: 401(k) plans, mutual funds, IRAs, or even stock-purchase plans. Mutual funds are long a basket of stocks to provide average investors with a diversified portfolio. Throughout the history of the stock market, aside from the past 15 years, the market has moved in one direction: from the bottom left to the top right, a perfect way for any investor to make profits. However, recently it is more of an uphill battle, as the S&P 500 futures have only recently set new record highs. Since 1999, the stock market has been basically ...

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