It's All About Leverage
Starting out-of-the-money can be a good thing
By JAY SHARTSIS
ARE YOU BETTER OFF buying in-the-money or out-of-the-money options? Veteran options trader Meyer Eisner, editor of the Oil Options Hotline, believes "you're trading options for their superior leverage, very often five, 10 or even 20 times the leverage offered by the underlying stock, so you always want to look at the delta," a Greek symbol representing the expected percentage movement of an option compared with a one-point move in the underlying stock.
Eisner suggests that when buying options, you want to open positions that are 3% to 6% out-of-the-money, with a delta of .45 to .50. If you're right and the option moves into the money by 3% to 6%, the delta will increase to 80% to 85% and "that's the time to take your money and a big percentage, and run!"
As for buying contracts that are in-the-money, they give you leverage that is closer to that of the underlying stock, which is not why you buy options.
By the way, the delta on options is available on the option chains at the Philadelphia Exchange Website at www.phlx.com.
Right now, Eisner "love[s] the oil and natural-gas sector companies that have reserves far away from the Mideast ...that also replace their production with new reserves: Natural-gas giant EnCana (ticker: ECA) and Anadarko (APC) are strong. Also, oil-rich Apache, sitting on almost two billion barrels of oil reserves, is one of my favorites. Their out-of-the-money calls look juicy to me."
Also, dollar weakness and oil-price hikes are adding to rising interest-rate concerns, spurring worries about negative implications for financial stocks -- which make up 20% of the Standard & Poor's 500. Bill Johnson, chief option strategist at 21st Century Investor, suggests hedging risks in this group by buying puts on the Financial Select Sector SPDR Fund (XLF) -- a mutual fund that trades like a stock. With that index recently near 30, the January 2006 $30 put is offered at $1.90 and Johnson says that "the XLF at-the-money LEAP [long-term call and put] options are a cost effective way to hedge the trend of rising rates while maintaining your long-term money in the S & P 500." He further notes that "this index is still close to its highs and does not yet discount an environment of rising rates."
THAT WAS ONE DRAMATIC TURNAROUND in Merck's fortunes recently. The March 30 call, for example, languishing at 30 cents before news of a possible reintroduction of Vioxx hit, jumped to $2.80.
And how was the option crowd positioned before Merck's sharp run-up? The steady drumbeat of bad news, which sent Merck shares from near 45 in September to 27.50 in January, brought out the put buyers, big time. The volume-based 21-day put/call ratio for Merck options skyrocketed from about 50 (50 puts traded for every 100 calls) when the stock traded in the $45 range last September to 115 in late January. Over that time, the 21-day dollar-weighted put/call ratio (cents in puts versus dollars in calls) also leaped from 80 cents to $2.30. Both measures reached levels of option-player pessimism not seen since October 2002 -- a classic contrarian case.
Other recent examples of noteworthy put-trading extremes are to be seen in General Motors (GM), Newmont Mining (NEM), Motorola (MOT) and XM Satellite Radio Holdings (XMSR). On the other side of the coin, option players have been very active call buyers in American Express (AXP), Boeing (BA) and, not surprisingly, Exxon Mobil (XOM). They have also been buying lots of calls in two stocks that have been quite weak this year -- eBay (EBAY) and Research in Motion (RIMM). This is odd, since one would have expected the put buyers (trend followers that they are) to have emerged by now in these tumbling stocks. In the upside-down world of option-player expectations, this bottom picking tendency is considered bearish.
ONE OF MY HOBBIES IS COLLECTING UNUSUAL option indicators. And one of the most obscure has been uncannily accurate in calling market turns lately. It is the "dollar-weighted" QQQQ put/call ratio, which measures the money flow in puts versus calls on the QQQQ [Nasdaq 100 index-tracking security]. That's unexpected; it's commonly thought that more accurate signals are produced by equity-based indicators, not index-based ones like the S&P 100 (OEX) and S&P 500 (SPX), or the QQQQ. That is because option trading in the indexes is heavily influenced by so many hedging strategies, not pure bullish or bearish sentiment.
But science must follow the data; over the past year, readings in the $1.50 to $1.75 (lots of bears) range have corresponded to market bottoms (March, May, August 2004). Readings near 50 cents (lots of bulls) have corresponded to market tops (January and December 2004). Now at about $1.10, this ratio is right in the middle of its range of the past two years -- perhaps still on its December 2004 sell signal -- and won't turn bullish till it gets back
Starting out-of-the-money can be a good thing
By JAY SHARTSIS
ARE YOU BETTER OFF buying in-the-money or out-of-the-money options? Veteran options trader Meyer Eisner, editor of the Oil Options Hotline, believes "you're trading options for their superior leverage, very often five, 10 or even 20 times the leverage offered by the underlying stock, so you always want to look at the delta," a Greek symbol representing the expected percentage movement of an option compared with a one-point move in the underlying stock.
Eisner suggests that when buying options, you want to open positions that are 3% to 6% out-of-the-money, with a delta of .45 to .50. If you're right and the option moves into the money by 3% to 6%, the delta will increase to 80% to 85% and "that's the time to take your money and a big percentage, and run!"
As for buying contracts that are in-the-money, they give you leverage that is closer to that of the underlying stock, which is not why you buy options.
By the way, the delta on options is available on the option chains at the Philadelphia Exchange Website at www.phlx.com.
Right now, Eisner "love[s] the oil and natural-gas sector companies that have reserves far away from the Mideast ...that also replace their production with new reserves: Natural-gas giant EnCana (ticker: ECA) and Anadarko (APC) are strong. Also, oil-rich Apache, sitting on almost two billion barrels of oil reserves, is one of my favorites. Their out-of-the-money calls look juicy to me."
Also, dollar weakness and oil-price hikes are adding to rising interest-rate concerns, spurring worries about negative implications for financial stocks -- which make up 20% of the Standard & Poor's 500. Bill Johnson, chief option strategist at 21st Century Investor, suggests hedging risks in this group by buying puts on the Financial Select Sector SPDR Fund (XLF) -- a mutual fund that trades like a stock. With that index recently near 30, the January 2006 $30 put is offered at $1.90 and Johnson says that "the XLF at-the-money LEAP [long-term call and put] options are a cost effective way to hedge the trend of rising rates while maintaining your long-term money in the S & P 500." He further notes that "this index is still close to its highs and does not yet discount an environment of rising rates."
THAT WAS ONE DRAMATIC TURNAROUND in Merck's fortunes recently. The March 30 call, for example, languishing at 30 cents before news of a possible reintroduction of Vioxx hit, jumped to $2.80.
And how was the option crowd positioned before Merck's sharp run-up? The steady drumbeat of bad news, which sent Merck shares from near 45 in September to 27.50 in January, brought out the put buyers, big time. The volume-based 21-day put/call ratio for Merck options skyrocketed from about 50 (50 puts traded for every 100 calls) when the stock traded in the $45 range last September to 115 in late January. Over that time, the 21-day dollar-weighted put/call ratio (cents in puts versus dollars in calls) also leaped from 80 cents to $2.30. Both measures reached levels of option-player pessimism not seen since October 2002 -- a classic contrarian case.
Other recent examples of noteworthy put-trading extremes are to be seen in General Motors (GM), Newmont Mining (NEM), Motorola (MOT) and XM Satellite Radio Holdings (XMSR). On the other side of the coin, option players have been very active call buyers in American Express (AXP), Boeing (BA) and, not surprisingly, Exxon Mobil (XOM). They have also been buying lots of calls in two stocks that have been quite weak this year -- eBay (EBAY) and Research in Motion (RIMM). This is odd, since one would have expected the put buyers (trend followers that they are) to have emerged by now in these tumbling stocks. In the upside-down world of option-player expectations, this bottom picking tendency is considered bearish.
ONE OF MY HOBBIES IS COLLECTING UNUSUAL option indicators. And one of the most obscure has been uncannily accurate in calling market turns lately. It is the "dollar-weighted" QQQQ put/call ratio, which measures the money flow in puts versus calls on the QQQQ [Nasdaq 100 index-tracking security]. That's unexpected; it's commonly thought that more accurate signals are produced by equity-based indicators, not index-based ones like the S&P 100 (OEX) and S&P 500 (SPX), or the QQQQ. That is because option trading in the indexes is heavily influenced by so many hedging strategies, not pure bullish or bearish sentiment.
But science must follow the data; over the past year, readings in the $1.50 to $1.75 (lots of bears) range have corresponded to market bottoms (March, May, August 2004). Readings near 50 cents (lots of bulls) have corresponded to market tops (January and December 2004). Now at about $1.10, this ratio is right in the middle of its range of the past two years -- perhaps still on its December 2004 sell signal -- and won't turn bullish till it gets back
选择“Disable on www.wenxuecity.com”
选择“don't run on pages on this domain”
