Steve Zito, MS Fin/BS Econ Wharton School, HTML Writers Guild
uses economic and technical analysis to forecast the direction of the stock market. The views in this newsletter are opinions only, and should not be solely relied on for your investment decisions.
*Nasdaq July 23 *Tech Stocks *Sitemap *Options *Subscribe Now

NASDAQ COMPOSITE
INDEX closed 1262.12

July 27, 2002 - Are OPTIONS a good bet NOW?

******************Page ONE*******************
July 27 Go To Page 2 Nasdaq Composite closed at 1262.12 on July 26. Nasdaq has fallen 20.53 (1.6%) since my July 23 page. My experience (I have traded options from 1980) is that in times of extreme volatility, little money can be made in options even if you get the direction right, because options floor traders using their Black and Scholes formula calculators bid up the options PREMIUMS sky high. When VIX, the Volatility Index is over 30 (last week over 50), sellers of options make the profits, and sellers are Wall St. institutions and bank trading ops which usually own the underlying stocks. They are selling stock and index options to hedge massive losses in portfolios. US stock markets will soon quiet down and volatility will drop in the next few weeks, for the simple reason the administration made a one-time public show of 5 Rigas family arrests (Adelphia Comm) and is unlikely to repeat arrest against ENRON or Arthur Andersen. August is a very slow month, a time when money managers go on vacation. So if the VIX can go back below 30 by Labor Day (close 40.44 July 26, last week's high at 57.31), and if the Democrats can score some more points for the next election in November, stocks may find a bottom by early September. Then call options on the most beaten up groups like Semiconductors, P-Metal, Biotechnology, Wireless Comm should be the place to take the risk. Tracking the Philadelphia Semiconductor SOX.X Index now at 315.01 (down from 645 in less than five months). If you can, try to track the Dec. 500 call option on the SOX.X Index. I once bought Philadelphia Oil Services Index OSX Apr 60 at 1/8, end of March 1999, that Index was 48, and two weeks later, those calls went to 6 1/2 when the Index went to 66. But it took six months for the OSX (Phl Oil Services Index) to make a base as oil hit $10 a barrel. Of note, CNBC's Larry Kudlow said that oil would go to $8, his "cost of production" one day BEFORE oil began a historic rally from $10 to $16 in Apr. 1999. The volatility in Nasdaq and Dow Jones today makes finding VALUE in stock options impossible (except foreign stock exchanges). I once knew a guy who sold naked deep in-the-money Index calls October 16, 1987, few days before Dow Jones crashed 23%. Did he make a fortune? NO. The man could not get his order to buy back the call options filled, because the exchange was overloaded and Fidelity Investments would not honor his closing orders. The next day, the Dow Jones recovered 300 points, and his gain evaporated. By the time he closed out, he was even. The bottom of the bear market in 1982 happened on August 13, 1982. That turn caught everyone by surprise, and I just happened to have been buying call options on Merrill Lynch, IBM, ASA (gold), and Boeing (BA was at 12) on Friday before the markets exploded to the upside. I made 50 to one in 3 months. The four stocks on which I bought calls all made the top ten list for biggest percentage gainers. Out of 15,000 listed stocks, I picked 4 out of the top 10 biggest percentage gainers.
How to Use Site. Scandals Andersen, KPMG Best Nasdaq Big-Caps
Copyright Notice, all pages Copyright©2002 and are made available as a service to the global Internet community. Pages may not be reproduced or sold in any medium without explicit, written permission from Steve Zito.