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Technology Stocks : Novell (NOVL) dirt cheap, good buy? -- Ignore unavailable to you. Want to Upgrade?

To: Ben Antanaitis who wrote (22005)	5/13/1998 4:54:00 PM
From: EPS	Respond to of 42771

Ben, I know, Peace! Victor ---------------------------------- Wrong! Dispatches from the Front: Cramer Explains the Expiration Week Follies By James J. Cramer 5/13/98 8:00 AM ET Revenge of the unexpired puts? Whenever I see the market erupt as it did Tuesday after some mindless sell program finished up, I am always reminded that expiration week brings with it these wild ramps. While I have long since given up the science of figuring out expiration (newbies might want to check out my considerable library of articles concerning expiration), I am acutely aware of the power of those who own puts with a short fuse. These puts spawn natural buyers who always come in and buoy the market when it looks ugliest, as it did various times both Monday and Tuesday. So let's look at this phenomenon and see if we can make money off it. A week ago Monday, The Wall Street Journal broke a story about how the Fed may have to tighten. The article left the impression that the tightening would be sooner rather than later. That inspired a host of strategists to get cold feet and Ralph Acampora to declare that the next 10% would be down. Ouch, was that wrong! Anyway, the hideous action that day spurred lots of people to buy puts. I know I did. I like a little insurance now and then as much as the next guy. But the market then reversed and these puts stayed on your trading sheets, without much to do unless a severe correction or swoon kicked in. Let's take a particular situation that I traded in and break it down. With Eli Lilly (LLY:NYSE) at 68 last week, I bought a couple of hundred May 65 puts for a fraction of a dollar. Why did I pick Lilly? One is that it perpetually acts kind of doggie. Two is that if Evista trends nosedive, the stock could head back to the 60s. Three is that there are a couple of Journal reporters who every few months do a savage Heard on the Street about Lilly, and they are about due for another riposte. Finally, the stock is very liquid and the puts trade easily -- meaning I could buy them without a problem. The next day Lilly traded to about 65, and I bought the stock knowing that I had the safety net of the puts underneath. A day later some buy program took the stock back to 68, where I sold it and got a terrific short-term return. (I say buy program because there was no fundamental reason for the stock to run, but the futures rallies took Lilly with them.) That left me, however, with these unexpired puts and a week's worth of time to employ them again. I chose not to sell them because of the possibility of re-creating that same trade between now and expiration. Sure enough, Tuesday, when the market looked terrible, and everybody figured that we were about to tank, Lilly went back to 65 and change. I immediately went back in and started bidding for Lilly. I was, in effect, the floor on Lilly because the stock did not trade an ounce lower. Why did I bid for Lilly instead of another company? Again, because I knew I would be stopped out below 65 by those same May puts if the stock kept barreling lower. That's the puts-as-safety-net thesis again. The puts emboldened me to buy common. Now, imagine that there are literally thousands upon thousands of put holders who also have this kind of protection. When the market sells off, all of the put holders instinctively want to use this insurance. We want to get our money's worth. So, we put bids in. When we aren't hit, we get a little desperate sometimes and begin to take. That, in itself, can precipitate a rally. At the same time, people who own index puts also see their opportunity to recover some capital during the downdraft, and they begin to blow those index puts out. I know I sold some Dow Jones 92 puts at the moment when the world seemed about to end on Tuesday, scalping a good little trade and taking my money out. Now let's consider the buyer of those puts. After his purchase he now has insurance to take stock or buy deeper calls against those puts. That action, again, buoys the market. That's why put selling is bullish! The collective buying action of so many put holders anxious to get that last juice out of their positions simply adds fuel to upward-biased stock programs that key off the bond futures. On Tuesday with the bonds up strongly, you could bet that this buying of common against puts and selling of puts outright to others would cause the market to have a nice rally. How predictive is all of this? I find that when you have a nasty selloff within an expiration, you frequently get this kind of herky-jerky up move in the final days of the expiration week. In fact, this is the only pattern I have been able to discern that makes me any money on expiration weeks. And now you know it, too. (Newbies -- discouraged by the difficulty of this piece? Relax; I will do a line-by-line textual analysis, hopefully worthy of Rowse on Shakespeare, this Saturday.)