This \&^#\&^#?\&^ DOT just doesn't work for me. I wanted to buy Net stocks through TheStreet.com Internet Sector index because it was the perfect proxy, but I am stymied at every turn by the massive premium and the illiquidity of the calls. (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.
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.
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.
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.
James J. Cramer is manager of a hedge fund and co-chairman of
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