These Sophisticated Traders Are Betting on a 1987-Type Crash

These Sophisticated Traders Are Betting on a 1987-Type Crash

While the stock market continues to rise to new all-time highs, the options markets are betting on a massive crash.

If you’re unfamiliar with options, they are securities that give you the right, (but not the requirement) to buy shares in an underlying stock or ETF at some point in the future.

The pricing and trading of options is a complicated thing, so for simplicity's sake you can think of them as bets on where you think a given stock or ETF might trade at some point.

Now, there are two types of options, Calls, which bet on the price of a security rising and Puts, which bet on the price of a security falling. Bear in mind, these are not, "open ended" securities, meaning you simply buy them and never sell.

No, options come with expiration dates, meaning at some point in the future, they will expire. So an options trader is not just betting on the direction of a security (up or down), but he or she is also betting on the move happening within a particular time frame (a week, a month, several months or even years in the future).

The point I'm trying to make here is that the options markets are more sophisticated than the stock market, and the traders who bet big in these markets are typically much more sophisticated than your usual stock market investor.

Which is why everyone should be concerned by a note Goldman Sachs published last week, noting that the options markets are pricing in a market crash similar to that of 1987 or 2008.

Goldman specifically notes that currently options that are used to bet on where the Volatility Index (VIX) will be trading a year from now are priced at 26.

That number (26) doesn't sound like much, but historically, the only time this contract has been priced at this kind of level has been around the 1987 Crash, the Great Financial Crisis of 2008 and the Crash of 2020.

Put another way, someone is betting and betting BIG that a crash is coming sometime in the next 12 months. We're talking a 20%-50% type decline in stock prices.

In terms of predicting WHEN this will happen, I use a proprietary Bear Market Trigger.

If you’re unfamiliar with the Bear Market Trigger, it has caught every major bear market in the last 20+ years.

I’ve identified the previous signals on the chart below. Using this trigger you’d have avoided 90% of the carnage during the Tech Bust and the Great Financial Crisis of 2008.

We came darn close to triggering this signal during the 2020 meltdown, but managed to just avoid it by the fact that stocks closed April 2020 up. Had April been a down month we would have a confirmed signal.

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