One Options Pro Makes Golden-Oldie S&P Trade

Just because the Nasdaq is the index to watch this year doesn't mean everyone has abandoned the old standby, Standard & Poor's index options.

Michael Schwartz, options guru with CIBC World Markets in New York City, took exception to our column proclaiming the decline of S&P options as hedging tools.

In fact, he said Tuesday that he dusted off the oldies and put on what's known as a "put bear spread," using S&P 500, or SPX, index options.

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Puts let the holder sell the underlying stock or index at a predetermined price in the future. Often, they are used as bets on a retreat and enable the holder to sell the index at a level higher than its current one.

Volatility Index Today % Change 22.57 -4.77 Source: ILX

A bear spread, according to the handy-dandy Futures & Options Strategy Charts provided by the Chicago Mercantile Exchange, is a good idea if you think the market will fall somewhat or is at least a bit more likely to fall than rise. The most popular position among bears, it is also a conservative trade when you are uncertain about your bearish stance.

Put/Call Ratio Today (Noon) Previous Close 0.45 0.35 Source: ILX

Today, the S&P index was up 12.34 to 1436.58 at midday. Schwartz bought the out-of-the-money SPX April 1375 put and sold the April 1325 put for a 10-point debit. Currently, April 1375 puts cost roughly 27 ($2,700) per contract, and April 1325 puts about 17 ($1,700).

Essentially, Schwartz's trade will have worked out if the index falls below 1375, making the put he bought appreciate in value, but stays above 1325, leaving the put he sold to expire worthless. The April 1325 puts were among Tuesday's most active SPX options.

"If the market trades down to 1325 in April, I'll have a 4-point return for every dollar of risk" put up, Schwartz explained. "If the market trades up, I lose the 10 points, but my underlying portfolio will be up. I'm hedging downside without capping upside. I sold another option to reduce the cost of my put insurance."

What's better for sellers is that SPX options are European-style options, which means they can't be exercised before expiration day.

At their current levels, the Nasdaq 100, or NDX, options are "kind of expensive," Schwartz said. "I use the SPX even though I have technology stocks in my portfolio, because I believe 85% of the SPX is tech-oriented. I participate in the downside of the market's move at less cost than using the NDX or even the QQQ (QQQ Quote)," the Nasdaq unit trust.

Speaking of which, a walloping 12,000 contracts of the February 180 puts in the QQQ traded Tuesday at a price of 1 7/16 ($143.75). The QQQ was up 2 5/16 to 199 5/16.

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Among equity options today, Conexant(CNXT Quote) has been among the most active equity options two days running, and the April 110 calls shot up 7 5/8 ($762.50) to 17 7/8 ($1,787.50) on volume of about 3,500 contracts. The stock, meanwhile, has run up 4 9/16 to 111 1/2.

And tiny Paging Network(PAGE Quote) hit the most-active radar Tuesday after prices for its call options shrieked higher across the board.

The stock was up 5/16 to 3 3/4, while the March 5 calls gained 5/8 ($62.50) to 1 5/16 ($131.25); March 7 1/2 calls also added 3/8 ($37.50) to 15/16 ($93.75).

The rumor mill was churning whispers that Paging Network's deal with Arch Communications (APGR Quote) may be bettered by a bid from another company. At these levels, however, one options specialist said he'd stay away.

"I think the junk bonds are a better idea than the options," said an options specialist with Miller Tabak in New York City. "They are too expensive now, and the premiums have really run up. At these levels, the options are probably a better sale."