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Strategies & Market Trends : Tech Stock Options -- Ignore unavailable to you. Want to Upgrade?

To: donald sew who wrote (55207)	10/10/1998 6:44:00 PM
From: Saulamanca	Respond to of 58727

Option prices soar in wild market By Michael Santoli Displaying a virtue uncharacteristic of the times, investors spent most of last week resisting an alluring temptation. That is, they refused to indulge the often risky urge to sell options that were trading at monstrously bloated values. Judging by the inflated prices of index and equity options for much of the week -- particularly Thursday, when some gauges of market fear reached historic heights amid the Dow's 274-point intraday collapse -- traders were staunchly unwilling to sell options, whether naked, semi-clad or demurely bundled. If option sellers among the investing public (as opposed to on the exchange floors) had shown up to trade Thursday, then surely the Chicago Board Options Exchange's Volatility Index, a measure of index-options pricing, couldn't have surpassed 60 at one point, reaching its highest level since October 1987. Normally (to use a not-so-relevant term for the present) this kind of extreme high in the VIX represents simply panicked put buyers seeking protection at any cost. The kind of horrid scenario that would warrant paying twice theoretical value or more for index puts would probably set Geiger counters squealing. Certainly, zealous put buying did its part on a fear-wracked day: The put-call ratio for individual stock options reached 0.98:1, an all-time high by the lights of veteran options man Larry McMillan. But as Kyle Rosen, options strategist at Strome Susskind Investment Management, relates, Thursday's elevated VIX resulted to an unusual degree from soaring prices for index calls: "Out-of-the-money calls were trading at 50 implied volatilities." That, like impeachment hearings for a President, has only happened two other times, he says: around the '87 crash and upon the launch of listed options in 1973, when valuation methods were crude. This indicates not that terrified put buyers were matched in number and intensity by drooling bulls, but that options sellers as a whole "ran for the hills," Rosen says. Place it on the list of hurricanes resulting from the flapping of Long-Term Capital Management's wings. The frantic rush to reduce leverage and reliquefy portfolios has kept players from shorting volatility in the form of option selling. Selling an option is a leveraged position that can potentially result in unlimited loss. Never mind reversion to the mean and "relative-value" strategies; faith in such things didn't help LTCM, after all. Without motivated sellers of options, the core cohort of traders impelled to buy by the need to hedge or the desire to go long stocks with less capital propelled prices skyward. That said, the extremes in the market present a serious opportunity on the options-selling side for those with certain objectives. Put selling on individual stocks is eminently attractive right now for those who truly want to own the shares at lower levels. The premium is collected -- and kept if the option expires worthless. And if exercised, the stock is bought at the strike price minus the premium. Now, there are difficulties in selling puts for the lone investor. Brokeragehouse managers generally hate the idea, fearful of lawsuits and client defections if trades go wrong, and many firms won't let investors sell naked options without full collateral. And don't be surprised if a number of chief financial officers themselves are right now cooking up their own plans to sell puts over-the-counter. Intel and other sharp companies have pocketed millions over the years by selling puts and either banking the proceeds or buying back stock at lower prices. On the other side of the market, anyone already owning stock can pounce on lofty option prices by selling juiced-up out-of-the-money calls. This offers downside protection in the amount of the premium collected and maintains upside exposure up to the strike price of the call. During the long ramping up of the bull market, this strategy was scoffed at for limiting upside potential. But in these changed times, all those skittish types piling into 10-year Treasuries now think less than 5% is nice-enough upside.

To: donald sew who wrote (55207)	10/10/1998 7:04:00 PM
From: blue_lotus	Respond to of 58727

Hi Donald, I would like to thank you for all the index updates you post here. They are always very informative, even when they are contrary to my opinions. And I have to say they are far more successful than my market timing endeavors. What do you think will be the effect of a good earnings report from INTEL on Tuesday. Though I agree with you that eventually we need and are going to get some form of downside movement. My intuition tells me that the market could rally further with a good report from INTEL. Any insights are appreciated. -Raj

To: donald sew who wrote (55207)	10/10/1998 7:54:00 PM
From: HairBall	Read Replies (1) \| Respond to of 58727

Donald: I know you can not comment on my cycle indicators, but I would appreciate your comments regarding the converging trend lines. The descending upper trend line projection for Monday is only approximately 100 points above Friday's close! NOTE: Since I last posted this view, I have given it further analysis and have changed the descending trend line slightly and the lower horizontal trend line! Cycle Indicator Signal Descriptions A = Sell/Buy Alert B = Short/Medium Term Sell/Buy Signal C = Medium/Long Term Sell/Buy Signal D = Long Term Confirmation As of Friday's close (10/9) my cycle indicators are giving “A” buy alerts on the Dow Composite, Industrials, NYSE Composite and SPX. Also, moving toward giving the same signal on Dow Transports, NASDQ Composite and Russell 2000. (The above mentioned Indices are currently in "BCD" sell signals!) Of course, I must mention that the Dow Utilities have received an “A” sell alert! With the overall market, moving counter to the norm with regards to interest rates, (IE: Interest rate drops normally help the market!) coupled with the Utilities being much more sensitive to interest rates, a divergence between the Dow Utilities and the rest of the Market is occurring. (The Dow Utilities are currently in “BCD” buy signals!) Conclusion: I believe the Market may have begun a rally or at least started a sideways period. This pause in the downturn started at the reverse off the intra day lows on Thursday 10/8. Duration and or price point I do not predict. Dow Industrials End of Day Theoretical Semi-Log Chart Long term triangle formation: I have been watching this convergence for some time, but thought a decision would be made by the market before these trends lines came into play! Draw the upper descending trend line by using the highs of 7/20 and 9/29. For the lower horizontal trend line I find 7380 is closest. The upper descending trend line projected forward one-day for Monday is approximately 8050 to 8075. I previously stated that I expected next week to be a decision week, but I posted to soon and upon further analysis, I think that may be too tight of a time line. Most likely next week, but surely by 10/23. Conslusion:* This triangle formation could be viewed as a very large descending triangle at the beginning of a down turn! In any case, the market as measured by the Dow Industrials is closing in on a decision point. The above converging trend lines, I believe, will require a decision from the Market, soon! A significant break above 8075 will at least portend a considerable bear rally. The next upside resistance at approximately 8250 then 8350. A significant break below should confirm the continuation of the bear market. The next support areas at approximately 7000 and 6500. COMMENTS? BWDIK Regards, LG