I recently caught up with some wise men of the options world to glean their thoughts on the market and the options industry. The consensus among those in the prediction business is that stocks should see high-single-digit returns in 2005, and there is general agreement that a good portion of the gains will come in the first half of the year.

Providing an example of early-year optimism is Tom Gentile, senior vice president and chief options strategist with Optionetics.com. He is among the many market prognosticators who think the market should continue to post gains in the first half of 2005. He expects the positive momentum to continue over the next few months, but Gentile tempered his moderately positive first-half outlook by saying he will "turn cautious heading into the summer."

Cautious on the Open Road

Gentile's near-term bullish outlook is based on the fact that he thinks improving economic data and the recent pickup in mergers and acquisitions and initial public offerings will provide a healthy underpinning to equity prices. He also notes that the November-to-May cycle has produced positive returns 75% of the time and expects that positive seasonal trend to continue.

His concerns for the latter half of 2005 stem from his perception that speculation and greed have increased among market participants. Gentile compares the recent rally to the headlights on a fast-moving car that attract bugs to them and then get squashed.

He believes many individuals are chasing risky stocks and may not be prepared for the bad news that could hit them. Aside from high valuations, Gentile also is wary of overplaying companies that benefit from a weaker dollar, because he believes the bulk of those benefits has already been priced into many of the multinationals' stock prices.

Even though Gentile is calling for a weak second half, he still expects the major indices to be up 10%-14% over the next 12 months, which leads me to categorize him as very bullish for the next three- to six-month period.

Consistent with his intermediate time frame, Gentile has focused on buying 60- to 90-day options with strikes that are either slightly in or at the money. Some names that he likes include

Regions Financial

(RF) - Get Report

, which he believes could be a takeover target, and gold and mineral stocks such as

Wheaton River Minerals

( WHT) and

Goldcorp

(GG)

. Those two companies, which are poised to merge, are more leveraged to the price of gold and should benefit from a price increase more than a big producer, such as

Barrick

, which tends to hedge or lock in a sale price for a large percentage of their production.

Forest Fire Danger Level: High

Also fond of metals and gold, but not nearly as optimistic, is Bernie Schaeffer, president and CEO of Schaeffer's Investment Research. Certainly not setting his investment vehicles on cruise control, Schaeffer said in a recent interview that he sees "a real possibility for the stock market to suffer a 20%-25% decline sometime in the next 12 months."

He cites the incredible descent of the Volatility Index, or VIX, to decade lows as evidence of a lack of fear in the market. And while a low VIX reading is not bearish in and of itself, Schaeffer believes the extended low level "creates a tinderbox" in which an unforeseen event could cause a large dislocation. That event could force the need for existing options positions to be adjusted in order to account for increased risk or market volatility.

For this reason, Schaeffer is moving a very high 25% of his portfolio into cash. And a good portion of his stocks or the investments he's making is in metals, both precious metals -- such as gold, which he thinks will benefit from a weak dollar and inflation -- and steel manufacturers such as

NS Group

(NSS) - Get Report

and

Olympic Steel

(ZEUS) - Get Report

, which are both up some 130% in 2004.

While one always needs to be aware that unforeseen events can and will occur, the question, as Tom Gentile puts it, remains: "What will be the match that lights the box?" The answer, to me, doesn't seem to be to move to the sidelines, but rather limit exposure accordingly. That means you should think twice about selling naked puts or allocating too much capital to one name or sector, and keep a little powder dry to take advantage of extreme, unexpected price moves.

Tomorrow I'll take a look at some industry trends.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Olympic Steel to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

As originally published, this story contained an error. Please see

Corrections and Clarifications.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to

steve.smith@thestreet.com.