LBR made this comment this morning:' "A huge amount of liquidity has been pumped into the system the past few weeks.....around $200 billion! This is over three times the amount that was pumped into the system prior to Y2K! " Will somebody please explain what she means by pumping liquidity into the system....
The Fed in addition to lowering rates added liquidity by modifying bank reserve requirements, so there is more money into the system. Banks are required to deposit part of the customers deposit money in vaults at the Fed. The higher the %requirements, the less liquidity as banks can use less deposit money for loans. The Fed did the same thing in the weeks before Y2K as a short term credit crunch was feared. It was thought people would rush to ATM's to withdraw as much money as they could. There are many economic glossary on the web: http://www.amosweb.com/gls/ http://minneapolisfed.org/glossary.html
COMMENTARY FROM THE RAVEN (Realitytrader.com): PRE-MARKET COMMENTARY OCTOBER 17, 2001 Many stocks and indices remain extended but refuse to turn down. As I mentioned yesterday, the market feels like it wants to go higher even though it is extended technically. I have a suspicion that there is some stimulus being provided by the Friday option expiration. There was huge put buying after the September 11 attack and a good deal of those positions will probably be unwound prior to the Friday expiration. Now that the markets have stabilized and are actually looking better it is less likely that put positions will roll forward. So until these positions are fully liquidated there will be buying pressure in the market. Can somebody explain precisely how the unwinding of put positions causes buying pressure. Is it options MM's unwinding their underlying positions, buying back short positions they have as a hedge ? Thanks
yes, you are correct in your understanding that it is the hedging of mm's (ie selling short when they sell an option)
Babak, I don't get it please elaborate. Hypothetically, if I bought puts when I was bearish after the attack, was I just buying them outright as a trade or buying them to hedge long positions? I don't know. Now I am less bearish so I "unwind" my puts. Am I just selling the puts I had bought to get something back before they expire worthless? If so, how would that create buying pressure in the equities markets. I am clearly not shorting stock as a hedge against the sale of puts as the sale of puts is closing a position is it not? Confused........................
DATTrader, I hope this helps. All you need to do is to think in reverse, i. e., put yourself in the position of a MM. When you buy a put contract, the MM is short one, in the hope that he will be able to buy one back later at a cheaper price--so that he can make some money, needless to say. In the meantime, however, he has a naked position. To minimize the risk of having the underlying stock "put" to him at an unfavorably low price, he thereby shorts the underlying. Because the market has advanced since Sept. 11, people will not likely roll over their put positions upon expirations. Instead, they will sell their puts and the MMs have to buy them back to cover their short put positions. However, as the MMs are short in the underlying stock, they also want to buy to cover that too. That's why you've got this buying pressure in the market. Hope I got this right. stockoptionist