The growth of options, especially on indices and exchange-traded funds, has become an important market dynamic, according to Larry McDonald, author of the Bear Trap Report. In fact, he cites this phenomenon of the last few years as a major driver behind the upward trajectory of U.S. stock markets.
McDonald detailed how most index or ETF options sell volatility and these options trading volumes generally suppress index volatility. Lower volatility generally coincides with rising equity markets.
Many of the ETFs employ straightforward call-writing strategies, where funds that are long stocks sell call options to generate income. For example the JPMorgan Equity Premium Income ETF is one of the fastest-growing ever and has grown to $41 billion. This strategy sells a lot of volatility.
