This Day On The Street
Continue to site right-arrow
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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Options Traders Kick Back, Enjoying the 'Greenspan Put'

"No one buys puts anymore," remarked the head of one options desk with a large Wall Street brokerage firm Friday. "Why would you do that when they go out worthless every time?"

At least one Wall Street brokerage house has a theory about why puts are on the outs with investors: because the Federal Reserve has sold them a free safety net, the only "put" on the stock market they need, a position being dubbed the "Greenspan put." It is becoming a more widely held belief these days.

Volatility Index
Today % Change
27.83 +1.87
Source: ILX
And as if on cue, call-buyers hit the usual suspects Friday, and institutional orders rolled in early in the trading day for Compaq (CPQ), Disney (DIS), America Online (AOL) and Nortel Networks (NT).

Put/Call Ratio
Today (Noon) Previous Close
0.32 0.35
Source: ILX
Among the most active strike prices were the Compaq, particularly the April 30 calls, up 1/2 ($50) to 1 5/16 ($131.25) on about 7,200 contracts. A showcase trade in AOL crossed on the Philadelphia Stock Exchange, where Susquehanna is the new specialist in the Internet blue-chip's options, in the July 92 1/2 calls, up 1 1/4 ($125) to 2 ($200).

"What we're seeing is that value stocks continue to be a source of funds for the highfliers," the trader said. "And that will continue until everyone and their brother sets up a home E*Trade (EGRP) account. Then we'll see the beginning of the end."

So why bother buying puts in a bull market? Puts give investors the right to sell a stock or index at a certain time and price in the future. That's a good way to profit from them if they fall.

Investors have snubbed buying such bets as they become more accustomed to the idea that Alan & Co. will step in and "save" the market with liquidity infusions, as the Fed did in cobbling together financial giants to rescue Long Term Capital Management during its 1998 collapse.

This theory has been floating around for a while, and it is difficult to price in the value of such an implicit, essentially free "Greenspan put" into the options market, said Steve Kim, derivatives strategist who helped author the Merrill Lynch report.

"The Fed has been acting very differently from the Paul Volcker days," Kim said. "In the '70s, the Fed was essentially powerless over the market, and Volcker was not the type to intervene with liquidity anyway."

In the Age of Alan, however, "there have been a few tests of his resolve, and now people have come to expect an implicit 'Greenspan Protective Put.'"

The Fed has never said this explicitly. "It's more implicit. Whenever the market is jarred, investors embed some new level of premium because of the behavior of the Fed."

Interesting theory. How do you price that Greenspan put option? "It's almost impossible," Kim conceded. "It's not as if you can say, 'that free put from Greenspan creates X floor in the market,' or that it's worth 5 P/E points on the Dow. What is the maturity? What are the terms? We just don't know."

What he and other option strategists do know, though, is that "there is now a perception of a safety net that creates a lower-risk aversion about how investors behave."

Ultimately, he added, the market's larger stocks are the beneficiaries. And it may help explain why volatility -- measured by the Chicago Board Options Exchange's volatility index -- continues to creep higher as the Nasdaq moves higher. Traditionally, when the VIX, the market's fear gauge, moves higher, that foretells a drop in the stock market.

Recently, the VIX has been moving up and outside its historical 17-to-25 range. Friday, the VIX was up 1.28% to 27.67. Meanwhile, the Nasdaq and the Dow continued to diverge, and the Dow teetered on the brink of the 10,000 level.

Kim pointed to this as further evidence that investors are more comfortable with higher risk in the market: They are pricing in the Greenspan put on the stock market. "If some guy in an emerging market country wrote me a put, it's worth nothing. But if the put is written and sold to me by the U.S. government the Fed , I know they're good for it.

"How tangible is this Greenspan put? That's what people need to consider. The Fed has been good. They have had the power to do it. The question is, will they do it again?"

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

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
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, 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
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,778.15 +421.28 2.43%
S&P 500 2,061.23 +48.34 2.40%
NASDAQ 4,748.3960 +104.0840 2.24%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs