Net Options Plays Show Some Optimism
By Erin Arvedlund
Staff Reporter
6/7/99 2:12 PM ET
Time is on their side.
Apparently, there are investors who think Internet stocks are going to see their historic highs again, and those brave few are buying -- and selling -- time in the Internet sector at prices they figure are cheap.
Volatility Index
Today % Change
24.10 +2.77%
Source: ILX
Time, and its passage, is a critical part of pricing an option. In Internet time, a three- to six-month option is an eternity given that the stocks move so frantically over such short periods.
But on Monday, investors were testing the waters on some longer-term options plays on bellwether names such as America Online (AOL:NYSE) and CMGI (CMGI:Nasdaq) early on in the trading session.
"It could be people are taking advantage of the recent court decision, because it sounds like it could go all the way to the Supreme Court," said one equity options trader at Wall Street Access, a New York discount brokerage. "That could take years."
Meantime, "a lot of people believe that Internet stocks are going back to their new highs. They have to believe that to buy these things," said David Schultz of Summit Capital Holdings.
He said he was casting a critical eye over the three- to six-month at-the-money options in some Internet issues, although he declined to say which ones because "we haven't bought them just yet."
Longer-term options are typically less sensitive to shorter-term price changes, and for that reason, investors frequently use them as a substitute for buying underlying shares. Buying the option is less expensive because the investor is only paying the premium for the contract.
AOL shares were lately flat at around 117 1/16. An AOL January 2000 call struck at 120 cost about 28 1/4, giving the buyer a break-even stock price of about 148 if she planned to exercise. If it rose but failed to reach that level, the option could be closed out for a profit before expiration.
In the shorter term, traders were properly playing AOL's in-the-money June 110 calls, down 3/8 ($37.50) to 10 ($1,000) on volume of 2,454.
"We've also been seeing a lot of customers writing puts on January 90 puts out to the year 2000 on CMGI," said the Wall St. Access trader. "And a [writing] lot of straddles, because people believe that even though the [Net] stocks are going to come back up, the volatility is going to come in somewhat.
"CMGI is one of the most volatile, nearly twice as much as the market as a whole, so this customer is betting it has to come in. It's an incredibly bullish bet," the trader said.
Put/Call Ratio
Today (Noon) Previous Close
0.41 0.39
Source: ILX
A straddle is the purchase or sale of an equal number of puts and calls having the same terms, strike price and expiration date. Straddle buyers believe a big move is in the offing, while sellers are speculating that the stock won't move enough to make the buyers' play pay off and the whole thing will expire worthless.
So, once again, this investor is playing time: financing puts on CMGI on the belief the stock won't sink to that level by that date.
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