Nasdaq Bulls Moving to Long-Term Options Plays

As the big names get expensive, investors choose options over the stock.
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Watching the Internet and technology stock prices explode in fireworks on a daily basis just doesn't sink in like it used to. And in this wild world of expensive stocks, cheap, long-term options are emerging as the poor man's stock market.

With stocks so pricey, longer-dated options, also knows as


, are starting to emerge as cheaper alternatives to buying the equities outright. (LEAPS stands for long-term equity anticipation securities, listed options with maturities as long as 2 1/2 years.)

Disillusioned bear Jay Shartsis of

R.F. Lafferty

has taken to quoting longtime Internet bulls as proof that they will hang themselves on their words. To wit: James Dines of

Belvedere's Dines Letter

, an Internet bull who claims his subscribers have made bundles buying his recommendations: "To those on the inside, bubbles are invisible."

Yet, even if investors don't think technology and other stocks are overvalued, the names are still expensive, Shartsis pointed out. In a recent research report, he reminded that for all 4,800 domestic


stocks, the price-to-earnings ratio has skyrocketed from around 30 in 1995 to 178 (as of Dec. 10, 1999).

With prices for stock at such high levels, it's no wonder investors are trying to use their cash to play the options, which carry a small initial outlay compared to a stock purchase.

Gary Semeraro with

SG Cowen & Co.

said it's no secret that his customers are "doing a lot of


(MSFT) - Get Report

business right now in LEAPS." In part, he said that that's because Microsoft and other big tech-stock prices are simply too resilient to get in at a low. "Most of the tax selling was done before the beginning of the month. The stocks that haven't done well this year have already been sold. The stuff that has done well, investors keep piling into."

And even the options market, traditionally inhabited by smart money traders and independent thinkers, is seeing the kind of trading the rest of the market has witnessed this year. "Everything's been buying call

options on the dips and hanging with them," Semeraro said. Sound familiar?

Over the past six months, Semeraro added, he has seen a significant increase in the purchases by investors of longer-dated options, often used as a proxy purchase for someone who doesn't want to dedicate too much capital to the underlying shares. It's been "3,000- and 5,000-contract lots going out a year or two. What has helped also is that they are multiply listed. And if you are looking to build a position in an active name, they're a good deal," Semeraro said.

Microsoft's 2002 January 100 call options give the holder of that contract the right to buy the stock at 100 anytime up to the third Friday of January 2002. Typically, LEAPS buyers don't want to exercise and buy the stock. Instead, they'll stick with the option and gain appreciation as the underlying rises and then just sell the contracts back for a higher price.

Currently, that option is being priced at 33 1/2 ($3,350) and gives the buyer the right to purchase 100 shares at a price of 100. The stock today was trading at 111 1/16, up 2 11/16. The January 100 call that expires in 2000, however, was trading around 14.

While that January 2000 position is far less expensive than the 2002 option purchase, it expires in just five weeks. A long-term investor who is trying to leverage capital in a more efficient way would be more likely to compare the price of the long-term option to the underlying stock.

To get the same exposure to Microsoft shares, an investor would have to spend $10,000, instead of $3,350 to enjoy the luxury of a long-term position.

That's a bargain by any measure.