3 Major Macro Factors to Consider When Trading Options - dummies

3 Major Macro Factors to Consider When Trading Options

By Joe Duarte

The options market can be used to gauge the health of a stock market move. Monitoring option activity gives you a sense of the degree of fear or greed associated with an advance or decline. Before you jump into the markets themselves, however, it’s a good idea to consider three major macro factors:

  • Interest rates: Generally, low or falling interest rates are bullish for stocks, and rising interest rates are eventually negative. This may seem like needless information, but if history is any guide, the general trend of interest rates can affect the price of underlying stocks, which will affect the price of your options.

    It makes sense to keep your eye on interest rates all over the world. In the past, the U.S. Federal Reserve was the only central bank in the world with enough power to influence global markets. Presently, because all markets are linked, other central banks, specifically the People’s Bank of China, and the European Central Bank’s actions can also be market movers. It is important to understand that the U.S. Federal Reserve is still the most influential.

  • Central banks: Central banks set interest rates. Think of central banks as think tanks with power to move markets. In the 21st century, it’s even easier to follow what central banks are thinking because they use much plainer language than ever with regard to their intentions. And if their statements are a little vague, they now hold post‐interest‐rate‐setting‐meeting press conferences. What central bankers say at these moments can have significant effect on stocks, and, yes, that means your options will be affected.

  • Global economic trends: Because the global economy is mostly synchronized now, what happens in one country — especially China, as well as Europe and the United States — can affect not just the local economy, but also the globalized economic landscape. Eventually, economic activity leads to some kind of action by central banks, which eventually will have an effect on stocks and options.

It is useful to keep an eye on these very important external factors.