This is the time of year where everyone shares their predictions for the next year. It's kind of like making a new years resolution. It's a fun way to stop the chaos for a moment and think through to what possibilities may lay forward in the new year.
As the year comes closer to an end, more and more will take to the financial media to shares their predictions. Some are sort of funny while others really believe that their predictions will come true. The truth is it's just a guess right?
Is there a way to see what traders are actually thinking and doing to prepare for the new year? What I mean is, while everyone is busy sharing their opinion with the world, what are they, and other traders actually doing in anticipation of next years move.
For options traders there is actually a way to quantify next year's expectations, sort of. If you want to see what people are actually betting on happening next year then take a look at the S&P 500 Index (SPX). Now we'll use this as our example today, but just know that you can do this on any stock or other index you choose.
Once you have the SPX (or anything else) loaded on your trading platform, go to the options chain and load up all the dates available. Now for the SPX the current price is 2675 so let's look at the 2675 put and call. Total up the cost of each. In our case the 2675 call is trading for $147, and the 2675 put is trading at $134. Add up this is $281. Now subtract $281 from $2675, as well as add it to $2675. So we end up with two numbers: $2394 and $2956.
These two numbers are the expected range that is expected by traders that are actually placing their bets. So, as of now traders expect as much as a 10.5% advance or decline next year. Now when someone asks you what you think the market will do next year you can say it's not a matter of what you think, but traders (with a lot more to lose than you) expect plus or minus around 10%. Happy trading!