John,
Thanks for your informed posts about OMKT fundamentals. The patent article was an especially good reminder about why a long position in OMKT is a good bet.
RE: Tax Loss Selling: It may be incorrect to assume tax loss selling has been completed. Most of the trades in OMKT are small lots (500 shares, 1000 shares, 2500 shares, etc.), a telltale sign of individual investors. Individuals may sell at any time until 12/31/98 to get a tax loss. Some wait until the last moment in hopes of a little more share appreciation and then sell. I suspect that is what is happening recently.
For the above reason, I would expect OMKT to move up nicely next week once tax loss selling pressure vanishes and people begin to focus on earnings which should be better than expected.
Note that there has been no earnings warning. Most companies have already issued earnings preannouncements by now. OMKT has not done so, which is a good sign.
Institutions do most tax loss selling by October 31st as that is when most institutions' tax year ends.
Re: Covered calls... It is referred to as SELLING covered calls, not buying covered calls. Here's how it works: If you hold OMKT shares long and you want some downside insurance in the near term, you may "sell covered calls" against your long position. For example, today,
the February $17.50 calls are selling for $1.125. If you don't think OMKT will go above $17.50 by the third week of January, you can sell calls against shares you own as insurance.
Each call option contract controls 100 shares, so for every 100 shares, you can collect $112.50 for each contract. Assuming you hold these calls until expiration (3rd week of Feb) and OMKT does not close above $17.50 at that time, you can keep the proceeds of the covered call option.
If, however, OMKT closes above $17.50 at expiration, you forego those gains because the owner of the calls has the right to "Call the stock away" from you at the higher price, and thus capture all the gains above $17.50.
The open interest (number of outstanding call or put contracts) on OMKT contracts is definitely skewed in favor of the calls, indicating options players are far more bullish. |
