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Strategies & Market Trends : Classic TA Workplace -- Ignore unavailable to you. Want to Upgrade?

To: AllansAlias who wrote (77159)	7/8/2003 12:01:37 PM
From: John Madarasz	Read Replies (1) \| Respond to of 209892

...again, fwiw from Rainsford Yang The QQQ (Nasdaq100 tracking stock) formed an 'inside day' Monday 6/30/03 as the major stock averages hovered near unchanged for most of the session. Despite the lack of movement, QQQ options were unusually active, particularly on the put side as over 400,000 puts traded hands. That sent the QQQ put/call ratio up to a big 3.29 at the closing bell, generally a short-term positive sign for the Nasdaq... Back in my June 24th column, available in the archives, I posted a track record of the QQQ's performance in the three days following a closing QQQ put/call ratio over 2.50. In the majority of cases, it's led to a short- term rally, implying we could see buying pressure resurface heading into Thursday's abbreviated session. Today, I'd like to delve further into why today's QQQ put/call ratio was so high and what it indicates beyond the prospects for a short-term rally. As I mentioned earlier, over 400,000 puts traded Monday, but nearly half of that put volume was due to a single trade on behalf of a large institution. A little after 1pm ET, approximately 100,000 of the QQQ September 25 puts were sold at 25 cents and approximately 100,000 of the QQQ December 25 puts were purchased at 70 cents, for an overall net debit of 45 cents. That represents a multi-million dollar, out-of-the-money calendar spread. A long calendar spread such as this one involves the sale of a near-term option and the purchase of a longer-term option of the same type and strike. Long calendar spreads reach their greatest value at the strike at the time of expiration of the short option. To illustrate why, let's review the various potential outcomes heading into the expiration of the September options. The first possibility is that there's virtually no change in the price of the QQQ, meaning it's trading around 30 at the September expiration. If this occurs, the September puts expire worthless (for a profit of 25 cents - remember they were sold) and the December puts would be worth approximately 30 cents (for a loss of about 40 cents on the original purchase), creating a net loss of about 15 cents. The second possibility is that there's a solid rally. For argument's sake, let's say the QQQ rallies 10% to 33 at the September expiration. Should this occur, the September puts would be worthless (25 cent profit) and the December puts would be worth somewhere in the neighborhood of a dime (60 cent loss), creating a significant net loss of about 35 cents. The final, and most lucrative possibility is a significant decline over the next 2-3 months. Assuming the QQQ falls 10% heading into September's expiration, the September puts would again expire worthless (25 cent profit), but this time the December puts would be profitable as well, most likely trading in the neighborhood of 90 cents or more depending on how much volatility has increased (let's assume a 20 cent profit). Such a selloff in the Nasdaq would create a significant net profit for the calendar spread in the neighborhood of 45 cents. And if the QQQ falls more than 10% heading into the September expiration, this position would become even more profitable, clearly indicating that the institution responsible for today's calendar spread has a bearish outlook for the next 2-3 months. astrikos.com