The Cure for the Options Hangover

We should look for a boost if the put-buyers don't get the bad news they are looking for.
Author:
Publish date:

First, the bad news: I see lots of put-buying in various indices, including the

Nasdaq 100

and the

S&P 500

. Next, the good news: I see lots of put-buying in various indices, including the Nasdaq 100 and the S&P 500.

Yeah, you read that right. Initially, this kind of put-buying always causes weakness in the market. First, there is the spillover buying. "Guy buying puts -- I better buy puts," is pretty much the modus operandi of a lot of people.

Secondly, market makers have to sell these buyers the puts. They, in turn, have to short stock so they can be neutral. They don't want to be long or short, bet with you or against you. If you are having trouble understanding this, and I know some of you are, think bookies. They don't want to go long any one game. They want to run a balanced book. If they see too much money going toward one side, they lay it off to the other. So do options market makers.

But once these put positions are slapped on, they can be the fuel to lift the market if nothing negative materializes. If I am right that this market's decline is the normal result of an

options hangover, then we should be prepared for a move back

if

the put-buyers don't get the bad news they are looking for. I always love to hear that there is put-buying if I am confident that the fundamentals (earnings and the bond market) will be strong.

So I am watching this options activity. The more put-buying today, the worse today will be, but the better the rest of the days of the week will be

if

nothing bad happens.

I am not sweating it.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.