from barrons
Option Oxymoron
Internet indexes may just be too rational
By Michael Santoli
It has rapidly become a cliche that adding the word
"Internet" or ".com" to the name of any old company is a
formula for propelling its stock price heavenward. These
days, the Internet Buggy Whip company could probably
float a few million shares and start trading with a $1
billion market value.
It's worth asking, then, why options on the various
Internet-stock indexes have failed to attract much interest
even as the underlying shares and their individual stock
options captivate investors with daily Flubber-like
bounces on huge trading volumes.
The Chicago Board Options Exchange has the CBOE
Internet Index (INX) and the Goldman Sachs Internet Index
(GIN), while the American Stock Exchange lists the
Inter@ctive Week Internet Index (IIX). Yet despite
containing all the cult names like Yahoo and AtHome, open
interest on the two CBOE indexes numbers in the mere
hundreds of contracts, while the IIX -- at 1,600 -- is
somewhat ahead but not exactly reflecting the breathless
wildness of the sector.
One reason offered for the underwhelming reception given
these young products is the composition of the indexes.
With a healthy slug of networking-equipment leaders, the
IIX "is kind of like the Cisco index," notes Salomon Smith
Barney options strategist Kevin Murphy. That's because it
is market-capitalization weighted and thus largely at the
mercy of that Nasdaq bellwether and other big oufits like
Sun Microsystems, even though the index contains a hefty
51 stocks.
The INX also has the Ciscos and Suns, but it is
equal-dollar weighted, easing the distortive effect of the
companies' girth. Yet even the Goldman index, which is
very close to a pure Internet barometer, with 11 tightly
focused names, hasn't lit up the floor of the CBOE.
One floor source suggests that the rodeo cowboys who
love to ride these turbulent sectors prefer the extreme
volatility of the individual stocks and options to the
somewhat diluted -- if more convenient and safer --
indexes. For some people an instrument like the GIN --
which has traded as low as 91 and up to 191 in the last
year -- just doesn't offer enough action.
The larger picture is that the
interest in index options
overall has severely lagged
the recent investor zeal for
stocks and individual options
trading. Index-option trading
volumes have never touched
their 1986-1987 peaks even
as stock-volume levels have
soared. And the quicksilver
gyrations of the Nasdaq
haven't prevented the average
daily volume in Nasdaq 100 (NDX) options from trailing
1997 levels by 18% in the first half of 1998.
Murphy says it was only last week that his desk began
seeing an uptick in the number of inquiries about trading
the NDX. Many investors balk at buying, however,
"because there's a perception that the options are too
expensive," Murphy continues, "even though,
percentagewise, the prices are not out of whack."
Many sector indexes, such as the IIX, get out of the box
with a burst of activity. The Philadelphia Stock Exchange's
OTC Prime Sector index -- housing the 15 most active
Nasdaq stocks -- has traded a respectable 18,000 contracts
in its first month, versus an average of about 150,000 for
the NDX, its natural rival. One product that has won the
consistent attention of institutional traders is the Morgan
Stanley High-Tech 35 index on the Amex, with open
interest around one-third that of the NDX.
Perhaps, as in so many facets of the Internet-stock
phenomenon, there are rational strategies being ignored. It
seems that reasonably priced, prepackaged plays on a
searing sector are worth at least a look. Keep in mind that
buying a put on the GIN risks only the price paid. Can the
same be said for shorting Yahoo at 185?
The CBOE and Amex plan to list options on Telebras
HOLDRs after the securities begin trading, which is
expected to be Tuesday. The HOLDRs, a Merrill Lynch
product, are baskets of the 12 stocks to be created by the
breakup of the Brazilian telecom giant. |
