Erin Arvedlund and Bernie Schaeffer Chat on Yahoo!, Dec. 9

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Erin Arvedlund and Bernie Schaeffer chatted on Yahoo! on Thursday, Dec. 9, at 5 p.m. EST. As with all chats, this transcript is unedited.

laura_the_street:

as you can see, Bernie Schaeffer is here and ready to go

bernie_tsc:

Hello! Bernie Schaeffer here. I'm ready to answer your questions.

arvedlund:

hi bernie

bernie_tsc:

Hi

arvedlund:

I'll start the questions.

arvedlund:

In regards to potential Y2k problems, Bernie, could you advise us on whether or not you'd be buying options either dated in December or January for some sort of Y2k protection?

bernie_tsc:

I assume you mean buying put options to protect stock positions. I would not - these puts are expensive and I'm very bullish.

rivits_99 asks:

Why do you set such a short hold time for leaps?

bernie_tsc:

We try to use LEAPS as a stock substitute and our holding period for stocks is generally a few days to a few weeks.

dyrrab asks:

Most option services make a point to include both calls and puts in their recommendations. The Option Advisor frequently will only include calls. Isn't it wise to also include some puts in our portfolio as protection?

bernie_tsc:

In general, it is wise to avoid being too heavily exposed on the call side - but if I'm extremely bullish - as I have been for quite awhile - I feel that puts are a poor idea.

arvedlund:

Let's say someone had about $1 million portfolio, dating back to the 80s, but about 35% of it was on margin. What would be the best strategy to avoid having a margin call? Using options that is.

bernie_tsc:

To reduce the impact of margin calls you might want to buy protective puts on your stocks. This way, you have the right to sell your stock at a higher than market price if the stock declines sharply.

arvedlund:

Bernie, I have a detail to ask you. Would you specify Dow puts or S&P puts for that particular strategy? Maybe even Nasdaq?

bernie_tsc:

My choice would be to buy puts on specific stocks that constitute a major portion of your portfolio or stocks about which you are most concerned - if you use index options you will not protect yourself from "company specific risk."

lyssands asks:

Where are the best online sites to learn about options?

arvedlund:

This is your plug, Bernie

bernie_tsc:

I find the CBOE site and the options industry council sites (optioncentral.com) to be excellent. And in all modesty, my site is excellent as well -OptionSource.com

arvedlund:

I like the Chicago Board Options Exchange's website for starters: www.cboe.com. Any others you use often Bernie? I also use the Options Industry Council as well. Also, the individual exchanges as well, like www.phlx.com, www.pacificex.com, www.nasdaqamex.com.

pnubull asks:

Bernie, what's your put/call moving average indicator tell about the market right now? I heard that the ratio is pretty low (meaning we are close to market top)?

bernie_tsc:

Great question - this indicator gave a screaming buy signal in October - while the p/c ratio has turned sharply lower on the big market rally, it still has a ways to go before it bottoms and signals a top - also, be careful because top signals are much less reliable for p/c ratio than bottom signals

arvedlund:

Some people I speak with say the put/call ratio is an outdated indicator, since so many large option trades now hit the trading floor and skew the ratio. Is that true?

bernie_tsc:

I strongly disagree. In fact, with the competition now among exchanges and the lowering of bid/asked spreads there are more individual investors (including day traders!) trading options than ever before and it is growing tremendously each month.

kit3336 asks:

What do you think about TYC? Is it time to buy calls?

arvedlund:

Reporters at TheStreet.com aren't allowed to own stock, so I can't help on this one. Take it away, Bernie.

bernie_tsc:

One of the problems that many options traders have is they want to try to pick bottoms in stocks that have plunged or tops in stocks that have skyrocketed. Going counter-trend is a very dangerous game for option buyers as your time premium is constantly deteriorating and you're waiting for the battleship to turn around.

lyssands asks:

What are some of your current favorite calls to snatch up?

bernie_tsc:

My favorite stocks for the short term include - YHOO AOL GTW SUNW CSCO AMZN MOT.

arvedlund:

It would help me to know you screen for mis-priced, or cheap, options, Bernie. What your parameters are...

bernie_tsc:

First, my main driver for options trades is ALWAYS a combination of the price action of the stock and the sentiment on that stock based mostly on option activity (volume and open interest). When I have a "buy" candidate I then look at recent historical volatility and compare to implied - if not far out of line I'll buy - also I like to buy deep in the money options.

bernie_tsc:

On volatile stocks - this way you have a lot of intrinsic value in the option premium and the degree to which the option is over or under valued becomes less important.

k9pete_98 asks:

How about options on the qqq?

arvedlund:

I was just going to ask about that... the implied volatility is going through the roof on QQQ options.

bernie_tsc:

This is very interesting - QQQ options are being played almost totally on the put side - in fact the ratio of open puts to open calls on the QQQ is now almost 6 to 1!

arvedlund:

Wow. That's incredible. This is pretty complicated question because of a lot of people are using QQQs as to way to play the Nasdaq.

bernie_tsc:

- To me this is very bullish in its implications, as everyone is trying to pick a top in the QQQ despite how strong it has been - one more thing on QQQ -

bernie_tsc:

- today's volume of over 13 million shares was the 3rd highest ever -

arvedlund:

The QQQ for those who don't know is the Nasdaq 100 unit trust in the QQQ, which trades on the AMEX. I believe Susquehanna is the specialist firm on that.

bernie_tsc:

- This was the result of today's sharp intraday pullback that took the QQQ down 6 points from top to bottom - we find these big volume days in QQQ on weakness to be very bullish contrarian buy signals.

lukygut asks:

Bernie, do you trade OEX options based on day types? (I've found that there are a certain # of 1-day chart patterns, every day exhibits one, and when analyzed they can predict future OEX moves.)

bernie_tsc:

No - not something I do.

brmacdon asks:

Bernie - the VIX is trending in the 20 - 22 range. How low before we see a correction?

bernie_tsc:

Love the question - while VIX is at the low end of its range there's something different this time - because the VIX has been considerably higher in its implied volatility than the ACTUAL vol. of the OEX lately. In other words, even though the VIX has been low, it's been HIGH relative to actual OEX vol. which has plummeted -

arvedlund:

So, the volatility of the market is actually declining? in S&P volatility.

bernie_tsc:

- yes - OEX/SPX vol. has declined SHARPLY on this upleg to the 13-15% area - we've found that low volatility rallies like this usually have a lot of staying power.

arvedlund:

But the volatility of NDX has actually risen. I think the implied on QQQ is exploding, and historically the QQQ and SPX were in tandem.

lyssands asks:

I'm wondering if CPQ would be good call for summer?

bernie_tsc:

CPQ has been just about the worst performing big cap tech stock, yet many option traders look to buy calls because the stock is "cheap" and beaten down this is NOT how I suggest approaching call buying - look for the relative strength LEADERS and avoid the laggards.

scielo asks:

Hi Bernie. I'm a 27 y.o. investor with about 200k split between long term investments and short term trades. What percentage of my portfolio should be allocated for options?

arvedlund:

Not bad. Are you a beginner in options?

scielo asks:

yes.

bernie_tsc:

If you are a beginner I'd strongly suggest learning everything you can about options before you trade the web sites we mentioned earlier would be good for this - also Larry McMillan's books and my book.

brmacdon asks:

Bernie are you bullish on the overall market or just technology because drugs and financials have been behaving badly.

bernie_tsc:

Good question - I'm bullish on the overall market but I'm hugely bullish on tech. You are correct about the banks and drugs. The BKX and DRG indices are now below their 20-month moving averages which is often a sign of a bear market in a sector.

nhat8888 asks:

If the put/call ratio is better for bottoms what is the best indicator for the tops? Vix?

arvedlund:

The VIX has been remarkably reliable, particularly in the last year.

bernie_tsc:

For tops you want to look for such things as complacency on pullbacks which has not been the case for quite some time. In other words, if we got a pullback and the VIX only advanced very modestly I'd be concerned.

lukygut asks:

When you foresee a major marketwide move, do you play spreads or go with a straight call/put purchase?

bernie_tsc:

Debit spreads (buy an on the money sell an out of the money) are ok as long as you realize that your profit potential may be severely truncated. I'd rather buy a deeper in the money call and be able to fully participate in a huge move.

mageshn asks:

Did a Strangle on MSFT - DOJ decision is out but nothing showing yet either side, your take on it. Jan expiry?

bernie_tsc:

I assume "did" means "bought." If you were looking for huge movement based on this decision you didn't get it. If that was your only reason for this trade I'd get out.

arvedlund:

Are there any further decisions coming up before January expiration?

bernie_tsc:

When your reasons for doing a trade are invalidated, you should get out of the trade rather than look for reasons to stay in.

NightRanger1999 asks:

Do you have a method for screening for cheap volatility?

bernie_tsc:

Option volatility is a low level screen with us. In other words, we are looking for stocks that are going to move far and fast - and if the vol. is reasonably in line we'll buy the option -

arvedlund:

When you say "in line" bernie, what does that mean? Do you have a percentage you could put on that?

bernie_tsc:

Also we like trading in the money options where deviations in vol. are not that important - on a stock with a 50% historical I'm ok with buying 55% implied on an on the money and 60% implied on an in the money.

pnubull asks:

Bernie, how high can the nasdaq & dow go before the end of the year?

arvedlund:

The Nasdaq has completely detached itself from earth's orbit.

bernie_tsc:

I think the Dow can reach 11500, which was my forecast for the 1999 high. The NASDAQ should do better -

bernie_tsc:

I think NASDAQ could potentially reach 5000 in 2000.

arvedlund:

Do you have a forecast for the Dow in 2000? Or does anyone care?

bernie_tsc:

- Dow high 13500-14000.

arvedlund:

The Nasdaq is the new Dow, huh?

NightRanger1999 asks:

Bernie, do you fade the market when the VIX gets low (like low 20's)?

bernie_tsc:

Be careful on low VIX - high VIX is a much better indicator of tops than low VIX of bottoms. Also VIX is low but has been high lately relative to actual OEX vol.

arvedlund:

I guess that wraps it up.

laura_the_street:

thanks for joining us this eve

laura_the_street:

our guest has been Options Guru Bernie Schaeffer.