I am not an expert, but I will give a try at "deciphering" the referred comments.
Lucent Technologies Inc. LU options were active on Thursday as investors scooped up calls before the stock splits on Monday, traders said.......
......"Usually the stock runs up and time premiums drop ahead of a stock split, but here it looks like the call buyers were wrong. (The calls are) probably a better sale than a buy," said Michael Schwartz, chief options strategist at CIBC Oppenheimer.
Jay Shartsis, director of options trading at R.F. Lafferty & Co., added, "I think this sell-the-split strategy is going to work well, and I'm considering mechanically shorting every split that comes along."
This tells me that an increased interest in buying calls seem to have been prompted by the upcoming split. I assume, based on the misguided premise, (my opinion) that a split "enhances the value of a stock".
The reality is that stocks go up because there are more buyers than sellers... their motivations, reasons, dreams or fantasies, are as varied as there are buyers, but that's another subject.
The April 110 calls were among the most actively traded on the American Stock Exchange, where about 2,600 contracts changed hands as the stock rose as high as 111-3/8.
These calls were the most popular probably because they were the closest to "out of the money" options, and given the momentum of the stock, of this past week, buyers assume that these "out of the money" options will soon become, "in the money options". (As now they have, based on today's closing price. (110.5625.... just barely).
Because of said momentum, the probabilities of such option to become, from an "out of the money", to an "in the money" option are the highest, therefore, the most traded, (highly liquid, and very fast in their price action).
The premium paid for LUDB (April 110), on Thursday, fluctuated from a low of 3.75 to a high of 5.5... not bad. (but take a look at Amazon... that is really obscene, unless you are in the receiving end of course.)
As a covered call seller, Lucent offers the best of both worlds, a solid company, (reduced risk), but at the same time, great volatility, yielding a killer combination of holding a great stock and the possibility of receiving a nice premium... Which means that even if they call away your shares, you were nicely compensated for selling them. (You can always buy them back on a pull back and repeat.)
Now... While Lucent has been able to pierce an important resistance level, (110), suggesting the possibility to reach 120, (with minor resistance at around 115... however, it may not be "clear sailing"...as if the above theory proves true, then we may have a slight sell-off on Monday, or sometime in the near future... I do not know.
Certainly the "outside world" events do not give a great sense of relief, so any slight "out of line" event could trigger said sell-off.
We shall know in ten more trading days.
The comments above seem to suggest, that for now, the price could be over extended and a retracement to a level below 110 is possible, particularly by April 17 (expiration date).
Interpreting what is said above, this means that selling the call, (as opposed to buying it), seems to be the better strategy, because once you remove the buying pressure originated by the "pre-split" activity, (as it is suggested), will not be there come Monday when Lucy will be now at 55.2811 (approx., based on Thursday close of 110.5625)...
The end result would be that the seller of the call option, keeps the premium and the stock, as they are suggesting that the April 110 call would expire worthless. (Lucy's price below 110 by April 16, last trading day).
The option buyer is left with a worthless option, without the premium paid.... (and whistling in the cold wind).
Then if you add to the above, the Max-Pain Point as often referred to by Ben, (and others) in this thread.... (which as of 3-31-99, it is $100.00),
ez-pnf.com
....makes you wonder if in fact, Lucent will be over $110.00 come April 17.
Is this right ?.... Well I do not know.... but it will be interesting to see which way it will turn out....
Soon we will find out. (10 more trading days)... And by the way, do not forget that an option is a dying asset.
Of course, all of the above, is my opinion only.
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Edit....
In addition... there has been positive moves in the MACD, cross over its own zero line and +DMI/-DMI with upturn in the ADX...
FWIW. |
