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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: bearshark who wrote (17587)	6/16/1999 2:15:00 PM
From: Sonny Blue	Read Replies (1) \| Respond to of 99985

Look Out Above: How Triple-Witching and Dovish Data Could Brew an Explosive Rally By Justin Lahart Senior Writer 6/16/99 7:00 AM ET With the monthly inflation report due out Wednesday morning and Alan Greenspan speaking Thursday before Congress' Joint Economic Committee, a lot of people have stayed out of the market. They sold into rallies, raising cash to put to work later, playing it safe. And no doubt, in uncertain times that's the proper strategy -- clients aren't paying money managers to be heroes. Heroes die, you know. But whenever there's event risk like this in the market, portfolio managers know they may come to regret their caution. The current risk appears to be this: If the May Consumer Price Index fails to raise fresh inflation fears and Greenspan neglects to suggest the Fed is on the verge of raising rates substantially, stocks could put on a rally. And with Friday's looming triple-witching options expiration potentially making any gain into an explosive leap, those accumulating cash ahead of this week's events stand to miss out on a big bounce. Triple-witching is the quarterly expiration of index futures and of options on stocks and stock indices. Always a recipe for volatility, witching this Friday has seen an interesting situation arise: There is a substantial amount of open interest in near-the-money June S&P 500 options, particularly in calls north of 1320. It's clear how the situation arose. For one, many investors are nervous and have lightened positions as a result -- but they don't want to miss out entirely if they're wrong. To hedge positions, they bought calls. "It makes sense that there has been a decent amount of interest in nearby strikes," said Rick Santelli, vice president at Sanwa Futures. "Equity traders are very smart to move their risk into the options arena -- not because it's safe, but because it's safer." Furthermore, stocks have been basically rangebound since March. Betting that this range would continue, some investors have actively written (sold) calls toward the top of the range and puts toward the bottom. Because stocks have lately threatened the bottom of that range, it looks as though many of the writers bought those puts back. As a result, there's less (though still substantial) open interest in near-the-money puts. Also, a large amount of the existing open interest is at 1275 -- a support level that hasn't broken since March. (If that breaks, however, look out!) If stocks rally off a good CPI or a less-than-hawkish Greenspan, near-the-money calls are going to turn into in-the-money calls. Anyone who wrote them will be forced to cover before they expire. Call-covering could send the index higher still, tripping past key resistance levels and sending the next tranche of near-the-money calls into the money. And so on. But not ad infinitum. "I'm not sure expiration will be able to put us out of the trading range of 1275 to 1400 [on the June contract] we've seen for the last few months," said Dave Eberhart, analyst at Optima Investment Research. Of course, the top of that range is a long, long way away.