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Late Y2K Worries Reach Nasdaq Options Play

With time passing, put-buyers look for some disaster insurance.

Buying wind shear insurance at the airport? It isn't that different from buying Y2K insurance for your stock holdings this week.

Wall Street uses options as just this sort of insurance, against something going wrong in the market. In this case, the bogeyman is a market crash as a result of year 2000 disasters of every stripe.

But in totally typical holiday behavior, lots of people seemed to wait until the last minute. And they're going to pay out the nose, warned option experts.

Salomon Smith Barney

, for instance, has been inundated with client calls over the past two days regarding portfolio insurance. "The calls started two months ago, but then with the market's rally, everyone sort of forgot about it," Kevin Murphy, the firm's retail options strategist, said. Clients are obviously concerned, and index options have turned dear.

"They're expensive," he groaned. "If you think there's a twister coming towards your house, but you don't know that it's hitting you, you have to pay up" for the last-minute protection.

Since the


has had the run of a lifetime in 1999, technology stocks have been the big winners. As a result, Nasdaq index options have emerged as the stock market's new thing. (A call option is a contract giving the owner the right to buy a stock -- or in this case, an index -- at a certain price and date in the future. A put option is the right to sell the underlying asset).

If only some of the tech index options were cheaper and more liquid, said Jordan Kahn, manager of his own

Kahn Asset Management

hedge fund in Santa Monica, Calif. The

Nasdaq 100


unit trust trades on the

American Stock Exchange

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An at-the-money January 158 put option on the QQQ is trading for 9 1/2 ($950) per contract, while the index is trading at 159 5/8, up 9/16.

Get that? Nine hundred and fifty dollars.

Still, with his portfolio weighted heavily towards tech, Kahn can't afford


to be hedged going into Y2K.

Kahn suggested moving into February-dated put and call options because options dated further out will be less vulnerable to time decay because they don't expire for more than eight weeks. "I'm purchasing February options holding them into January, and if nothing happens I can sell them," he said. "I don't have to hold them until they expire" in February.

However, the biggest downfall about options is that they do, indeed, expire. Kahn explained that he likes to subject himself to as little time decay as possible. If the market stays flat in January, the February puts would lose less time value than January.

"Anytime I can buy more time is advantageous. It costs more because you're buying more time. But on average it's worth it," he said. "I don't like to hold more options until expiration; I sell them a month early."

Kahn uses the QQQs as portfolio insurance, but the spreads -- the difference between the "buy" and "sell" prices -- on some of these index options " is unbelievable," he said. Same thing with

Morgan Stanley's High-Tech Index

, although the index "gives you a lot of bang for your buck"; overall, he prefers the

CSFB Technology Index

. Currently, the index trades at around 402.35, up from 278 in October.

The options on both of these index contracts are typically the province of institutional traders who need to hedge large positions in the underlying shares of technology companies.

There are alternatives to simply laying out a big hunk of cash for some pricey tech options, or even the all-purpose

S&P 500

index puts. More sophisticated investors like Greg Simmons, an index options trader and manager of

Linear Capital Management

hedge fund, recommend a "call" spread, selling one option to pay for the other and hoping the market lands somewhere in between their strike prices.

For the less experienced investor, though, the prices and risks of using these options are high, and grabbing them now for Y2K insurance would be like flying that airplane all by yourself.