In Options Pits, Index Plays Show Receding Fear
By Erin Arvedlund
Staff Reporter
7/1/99 2:08 PM ET
The blood bath didn't arrive. But if options pricing in indices is any indication, it could be right around the corner.
On Thursday, the key S&P 500 and S&P 100 market indices continued to rally after the Fed decided inflation wasn't a threat after all
But index options tell a different story, one that shows many more investors are long than short, and according to options contrarians, that's a warning something big and scary could be around the corner.
"I'm not a bear by any means," said Ron George of Sorrentino Asset Management with a bit of sheepishness. "But there's a fair amount of arrogance in the market." The Florida-based hedge fund trades heavily in index options and futures, and George said he's bothered by how the OEX index puts and calls, for example, are trading at prices he believes are completely out of whack.
Put/Call Ratio
Today (Noon) Previous Close
0.35 0.30
Source: ILX
"Look at the ratios, or at the puts and calls roughly 30 to 35 points out of the money, and you'll see that though they should be priced the same, they're not." In other words, at either end of the risk spectrum, speculation on the direction of an index option should cost about the same.
Not so, he pointed out. Currently, the OEX trades at around 705.60, up 0.26%, and at-the-money July 705 calls are trading up 1 ($100) to 9 3/4 ($975) on volume of 1,596.
Comparatively, July 740 calls are trading at roughly 1/2 ($50) per contract, but July 670 puts cost 2 3/4 ($275), showing that floor traders are pricing puts higher because they don't want to be long the market.
"That, to me, means nobody's short," George said. "And almost everybody is long. And that could cause a big hole in the options market if the stock market comes under pressure. We could still see all-time highs in the derivatives markets, but..."
thestreetcom
|
