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Stock Options in a Crisis
There always seems to be trouble in the world and it invariably affects the stock market. Many traders as well as long term investors choose to use stock options in a crisis situation. There are various options trading strategies but the use of stock options in a crisis is unique in that it can be both a defensive and an opportunistic play. We do not have to look back all that far to see an example of an externally caused crisis that rocked the stock market. The September 11, 2001 attacks on the World Trade Center Twin Towers and the Pentagon as well as the failed attack on the US Capitol Building brought not only a time of crisis to the United States of America but also to the capital markets of North America. The use of stock options in a crisis of the proportions the September 11 attacks is instructive for options traders.
An Attack on the American Homeland
The attack on Pearl Harbor in 1941 was a distant memory for many when terrorists hijacked four aircraft and took down the twin towers of the World Trade Center and attacked the Pentagon. Before that the only attack by a foreign power on US soil was in the War of 1812. Despite US involvement in two world wars, the Korean and Vietnam conflicts, the Gulf War and Panama Invasion, the US homeland was considered inviolate. Then, just before markets opened in New York, a plane crashed into the North Tower of the World Trade Center. Both the NYSE and NASDAQ did not open that morning and remained closed for four days. The longest previous shutdown was in the Great Depression in 1933.
Stock Trading in the Aftermath of the September 11 Attacks
The NYSE composite index fell 7.1 percent, 684 points, when the market reopened on September 17, 2001. At the end of the week the Dow Jones Industrial Average had fallen 1,370 points. Just less than one and a half trillion dollars in market value evaporated in the first five days of trading after the September 11 attacks. With this bit of history as a backdrop let’s look at stock options trading in a crisis. There was certainly good reason for panic after a dramatic attack on the US homeland and its financial center. There was good reason to sell off both American and United Airlines as their planes were hijacked and used in the attacks. One might have been wise to wonder if the airlines might be held negligent in the matter of in flight security. AMR, American Airlines, lost thirty-nine percent of its value and United lost forty-two percent of its value when trading reopened. The tourism and hospitality industries took big hits. Insurance companies paid out over forty billion dollars on claims. The flip side of these stock losses is that defense stocks and companies that sell services and weapon to the police saw their stocks rise. Both put and call volume rose on the CBOE with the use of stock options in a crisis.