Option traders joined their stock brethren in being heartened by this morning's
gross domestic product
data, and feeling the chipper aftereffects of a Wall Street-pleasing earnings
report from fiber optic equipment titan
According to one options strategist, it looks like the upside has a little more legs to it, as he suggested a bullish short-term trade to be placed on the close Friday. It should be noted, however, the strategy the strategist suggests does require a sizable initial investment for the position.
This morning, Larry McMillan of
in Morristown, N.J., offered clients an idea he said has been profitable for 21 of the past 22 years, based on the closing prices of the
The trading proposition calls for investors to buy
, better known as the OEX, call options on the close of trading on Oct. 27 and sell the position on the close of trading on Nov. 2.
"With the market acting so poorly this week, it seemed like the seasonal trade might not get into gear this year," McMillan wrote in a note to clients. "However -- perhaps being biased by the knowledge of the history of the seasonal trade -- I view Thursday's late recovery rally as the beginning of something very positive."
The details of the trade suggested by McMillan: Buy three OEX calls that are one strike price in-the-money at the close of trading today. He wrote that investors should sell one-third of the calls if the OEX jumps 15 points, and sell another third of the calls if the OEX rallies another 15 points on top of the previous 15. "Finally, no matter what, sell all
remaining calls at the close of trading on Nov. 2."
McMillan's trade is aiming for a broad market rally that will increase the value of the S&P 100 call options.
Doing this trade is expensive and investors will have to shell out a considerable sum to initiate the position and it may be more suited to institutional investors. But if you've got the means, it might be something worth checking out.
A call option is a type of option that gives the purchaser the right, but not the obligation to buy a security for a specified price at a certain time and is a bet that the underlying stock or index will go up.
At midday, the OEX was up 6.47, or 0.9%, to 727.09.
There was some interest in call options on
Friday before and after the company announced it is pondering a "range of its strategic alternatives, including the possible sale of the company."
Shares of Hercules, a chemical company, surged $2.13, or 13%, to $18.19, after trading as low as $15.38 intraday. Before the announcement, 335 of the Hercules December 15 calls traded. The calls were down 1/16 ($6.25) to 2 1/2 ($250) before the announcement; after the news, the calls perked up 1 5/16 ($131.25) to 3 7/8 ($387.50) on volume 453 contracts. The November 17 1/2 calls were up 1 ($100) to 1 1/2 ($150).
However, it doesn't appear many investors ready to make a big bet that the stock is going to go a heck of a lot higher than where it's at currently if the action in the out-of-the-money calls is any indication. About 80 of the December 20 calls changed hands, up 3/8 ($37.50) to 15/16 ($93.75).