Monday, October 21, 2002
Beyond Relaxing
After a rally, capping upside benefits
By KOPIN TAN
What now? As October options expired this weekend, companies from Microsoft to International Business Machines have reported earnings that have cleared the low bar of reduced expectations. But others, from Intel to Sears Roebuck & Co., have stumbled badly enough to keep the profit picture cloudy.
Investors holding call options, many of which have appreciated with the stock rally, can do better than relax now. With some stocks pushing toward their near-term resistance, many investors are looking at the options market for calls they can sell against recent stock purchases, picking strike prices at or just beyond the perceived ceilings -- depending on whether they want stock to be called away. In fact, the pick-up in such covered call writing indicates that these investors think stocks were oversold (hence the stock buying), but are skeptical about the extent of the rally (hence the short-term call selling, which caps upside benefits, should stocks soar.)
Investors who are concerned that stocks may be nearing the peak of their run-up also might think about moderating their upside exposure. According to Elliot Spar, Ryan Beck & Co.'s option strategist, they might sell existing calls to lock in gains while rolling desired positions up to higher strikes; sell half the call position to book some profits; or sell a further out-of-the-money call to turn the calls into bull spreads. |
