This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Expiration Watch Keen on Dell Options

If you've ever gone sailing in a hurricane, it's about as easy as trading on expiration day.

Options Buzz: Join the discussion on TSC Message Boards . "Expiration always juices up the volume as option investors buy and sell stock like maniacs, but the rest of the world thinks it's a rigged game -- and to some extent, it is," confided the head of one institutional options trading desk.

Volatility Index
Today % Change
26.11 +4.15
Source: ILX
Think of it this way: You're a retail rowboat trying to steady on in an institutional Mississippi. Big firms on this morning are buying back and selling hundreds of thousands of options, and each trade is usually paired with mammoth blocks of stock. "Most people just stay out of the marketplace," the trader said.

Put/Call Ratio
Today (Noon) Previous Close
0.45 0.46
Source: ILX
Still, there are always those special expiration-day plays. This time around many are watching Dell (DELL), because there is a massive open interest in the February 40 call options.

The swirly activity is due to an expiration-day phenomenon known as pinning the strike , when traders with large positions can keep the options they sold from landing in the money simply by selling shares of the stock. With Dell at 40 1/8, down 9/16 at midday, it could get hairy.

This month's expiration also seems to be confirming a trend where fewer investors are using index options such as the S&P 100 contract, called the OEX, to hedge their portfolios.

Index options, many of which won't expire until next month, aren't seeing the activity they once did. "More of the business is in the tech names -- Applied Materials (AMAT) and Cisco (CSCO) -- and aside from that we keep seeing the divergence of the Dow and the Nasdaq. While I can't say there's no index hedging going on," said Kevin Murphy, retail option strategist with Salomon Smith Barney, "we do see a lot more stock specific hedging."

Murphy says when investors are long the market, they "just always hedge that now with OEX options. You have to be do more stock specific hedging."

Even hedging the Nasdaq 100 unit trust, the mighty QQQ (QQQ), can be enough to rock your boat. "You can have one individual name -- a Qualcomm (QCOM), for instance -- that can go against you and really smack the index down." Nasdaq lists the weightings of the QQQ on its Web site .

There was some interesting activity to watch: A huge buyer stepped in to buy 4000 Home Depot (HD) out-of-the-money March 50 puts. With Home Depot shares up 7/8 to 55 3/8, the March 50 put is currently fetching 1 ($100), down 1/16 ($6.25).

The buyer is speculating that Home Depot's shares will fall to 49 by the third Friday in March or slide close enough to 50 to push higher the value of the March 50 puts, which give the buyer the right to sell Home Depot shares at that price by expiration.

On the more bullish side, some options traders were jumping on the biotech bandwagon by playing one of the industry's biggest firms, Amgen (AMGN).

Friday volume brought a 3000-contract trade in the out-of-the-money March 80 calls, which were up 7/8 ($87.50) to 3 3/8 ($337.50) as the stock reached 75. The open interest in that strike price totaled just 1380 contracts.

The calls give the buyer the right to buy Amgen shares for 80 by the third Friday in March. It would be a profitable endeavor if the stock landed at about 84 on that day or rose enough to carry the price of the option higher.

Meanwhile, the market's fear gauge, the Chicago Board Options Exchange Volatility Index, or VIX, has been creeping higher. The VIX closed Wednesday at 25.10, at the top of its typical range of 17.0 to 25.0, but well below the 45-to-50 levels touched in 1998.

"According to our research, the VIX appears to be understating market worries a bit," says Lance Ettus with ValueLine Options in New York City. Friday, the VIX hit an intraday high of 26.35 before settling back to 25.86, up 3.15%.

Further evidence that options are expensive: Ettus also points out that the average three-month put-and-call time premiums of all the options ValueLine follows are at their highest levels since the 1987 crash -- even higher than they were during the financial crisis of 1998. (Premium is the cost of an option).

"The reason for this discrepancy between the VIX and these average premium levels is the divergent market we are seeing these days," he continues. His argument goes like this: The low correlation of very volatile stocks within an index tends to dampen the volatility of the total index. So, the OEX, S&P 500 index, or SPX, and the Nasdaq may not have been that volatile recently, while individual stocks have. "Another reason for these high premium levels may be that investors have become very defensive buying equity puts, as they lost confidence in 1998 in the effectiveness of indexes as hedges," he adds.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.24 -0.41%
FB $117.81 -0.21%
GOOG $701.43 0.82%
TSLA $211.53 -4.96%
YHOO $36.94 2.61%


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs