Cramer's Rewrite of His 'Too Expensive on the DOT' Piece

Cramer revisits his Monday column about Internet Sector index.
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This &^#&^#?&^ DOT just doesn't work for me.

(Everybody calls this index the DOT, by its symbol, and it has caught on thanks to the mentions it receives from Bob Pisani at CNBC. But that doesn't mean enough people trade it yet to use it effectively.)

I wanted to buy Net stocks through Internet Sector index because it was the perfect proxy, but I am stymied at every turn by the massive premium

(Premium is the additional cost of a call above parity, or equality, with the index itself. So, let's say the index is at 400. If you were to buy the January 360 calls, they would usually trade at parity, or $40 (400-360=40) because they are so deep. That would be a perfect proxy because as the index went up the call would go up.)

and the illiquidity of the calls.

(Illiquidity is probably the bane of every professional's existence but is pretty meaningless for smaller traders. Illiquidity means the ability to get in and get out without moving the call option on the way in or out. When something is illiquid, that just means it doesn't have a lot of people willing to trade it. Really illiquid options trade "by appointment.")

(Editor's Note:

doesn't receive any income from trades on the index.)

For example, I am always willing to buy deep-in-the-money calls as a proxy for stocks. So, with the DOT at 412, I figured that I could buy the January 390s, 20 points in the money -- but those are at 52! You add 52 and 390 and you get 442, meaning 30 points of premium. These stocks have to have a simply gigantic move to make money with that contract. That's waaaaaay tooooo muccchhhhh premium.

(Here is what happens when you pay a lot of premium. As the index goes higher, a lot of times you get nothing. It is entirely possible that if the index rallied to 422, you would make three or four points, no more, as the premium shrinks as it goes higher. That's what makes these calls such a crummy bet. You would really feel the sting if you held them to maturity. Imagine this, if the index were to move slowly to 442 from 412, almost a ten percent move, you would make nothing!!)

So then, I figure, OK, maybe I will go deeper, to the 375s, but those are 62, for a total of 435, again way too much premium. Much too expensive.

(These were a real travesty. You couldn't buy them anyway. The markets were basically "ten-up" meaning they were only good for a ten lot. You need people to write these calls to get things rolling, and nobody is willing right now.)

Finally, I look at the bottom call, the January 300s, the lowest available, and I find out I can buy them for 123: still 10 points of premium! And considering the amount of capital it would take to buy a slug of them, I decide it is better just to go buy the individual stocks.

(Now you are taking a huge point risk -- 123 points -- to make very little if the stock goes up. That's a terrible bet and really sends you to buying the underlying components instead.)

Sure, I could sell a put as a way to get long, but my rules say don't sell something that could cost you a fortune when you know upfront how much you can make (the put can double or triple or quadruple but it can only go to zero).

So, I can't play with an index I want very much to be in. Just too expensive.

(Some people suggested why not sell a call on the index and buy the underlying common stocks. In some sense, this is a brilliant trade, but I am but a small shop and the timing of such a trade is very tricky indeed. The weightings, the ratios are all very complicated. But it is precisely that trade that the big guys should be doing to arbitrage this premium. And when it is done, this index will become the proxy it should be. That is where the liquidity will come in.)

James J. Cramer is manager of a hedge fund and co-chairman of

Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to