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Strategies & Market Trends : Tech Stock Options
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To: ViperChick Secret Agent 006.9 who wrote (32732)1/10/1998 9:38:00 AM
From: Patrick Slevin  Read Replies (1) of 58727
 
I understand what you are trying to say. For my own part I've been avoiding OEX (for the most part) and sticking with SP8x. The DJ contract or even E-Mini is better than sticking pins in my eyes with the OEX but if you are to choose the OEX it might help to try to understand whether or not the option in question is overvalued or not.

The following book was recommended to me by a CBOE member.

Option Volatility & Pricing by S. Natenberg. I received it in a day or 2 from Amazon for about $35 or so. List is $50.

It has been my understanding that one cannot consistantly do well without knowing how volatility affects option pricing. Certainly on can do well for a time, but floor traders know vol and pricing very well. This book reads something like a school text, but it has some charts and some formulae which probably can be loaded into a spreadsheet. I have not finished the book myself, but I imagine if you could get it on loan from a business library downtown it would help you with identifying which (if any) strike would be the best to take.

In any event, as you say, sharp moves such as those caused by programs are opportunities for MMs to strip or add premium to the options. If nothing else, one should watch carefully what is happening to the price of the option as well as it's sisters. That is, if you are looking at the Jan 945 put with the OEX at 943 I would try to pay attention to the pricing of the 940 put and the 945/940 calls. Say the market is experiencing a sharp move down and they are stripping the calls but not adding (much) to the puts, then it's reasonable to presume that the MMs strategy is that the selling is transitory...it has little strength. CBOE MMs are rarely fooled.

In any event, I would be reluctant to enter a position during a program because I probably would be 'paying up' for the position if it is in the same direction as the program and if it was contrary to the program I would be uncertain as to "when" the motion would slow. Again, it's more of an art than a science to determine whether or not you are in the middle of a program-guided move.
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