Trading in the Triple Witching Hour

Also, slumming with bulletin-board stocks, and some tips on using Internet index puts.
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Either

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readers are getting smarter or I'm starting to succumb to the mentally debilitating effects of New York City water after only a few weeks in the Big Apple. While I haven't exactly been inundated with queries as of late, the ones I have received are poignant reminders of the oft-overlooked information gaps in the financial world.

Bravo to all of you who stepped forward to help fill the potholes in our collective knowledge base. We can always use more hearty volunteers, so keep those questions coming in. I'll do my best to supply the actionable answers to keep you on the road to investment success.

Double, Double, Toil and Trouble

The term "Triple Witch" is mentioned all over the TheStreet.com, but I'm not sure what it means. It's not in TheStreet.com glossary. Can you help? Thanx. -- Christopher Myers, El Segundo, CA

Christopher:

The Triple Witch is a Shakespearean device used to convey a prophetic sense of the supernatural within an otherwise mundane human drama. You know, "Eye of newt and toe of frog, wool of bat and tongue of dog." No, wait a minute. I'm flashing back to one of Miss Murphy's 9th grade MacBeth sessions again. So much for all of those years of post-traumatic stress counseling.

Actually, the Triple Witching Hour refers to the final hour of stock trading on the third Friday of March, June, September, and December (I'm not making this up). Those are the days when stock options, futures, and index options all expire simultaneously.

So what, you ask?

Those are precisely the kinds of derivatives that program traders rely on to work their complicated, computer-driven models to conjure up the almighty buck out of thin air. As such, the simultaneous expirations can spark heavy last-minute volume on underlying stocks as program traders adjust their portfolios with massive chunks of capital. The upshot is that anything can happen in those last 60 minutes, lending an air of unpredictability to the already-teetering chaos.

Bulletin Board Blues

Good Noise Company (GDNO) has no chart. It is described in numerous places as OTCBB. What does this mean? Thanks! -- Hugh Durham

Hugh:

In essence it means that Good Noise has been relegated to the most obscure reaches of the over-the-counter marketplace. It's a tangled bazaar bristling with gamblers, hucksters, charlatans, and scrappy upstarts known simply as the Bulletin Board.

Think of the system as a kind of capitalist welfare program designed to give even the most disadvantaged waifs a forum to trade their shares to the public without tainting the landed establishment inside the castle walls. The companies consigned to the Bulletin Board presumably can't even muster the financial wherewithal to clear the modest hurdles needed to land a Nasdaq Small Cap listing, including a bid price above $1 and a $50 million market cap. Because of their small size and often scant operating history, getting information on OTC BB stocks is difficult at best.

In the case of GDNO, about all I turned up was a brief corporate summary and an almost completely blank financial statement listing a net loss of 1.2 million and not much else, all courtesy of Hoover's. Because of this lack of information, typically thin volume, high spreads, and dubious financial characteristics, investing in these obscure issues is highly risky. Use with caution and don't bet the farm, even if Good Noise strikes you as God's gift to Internet audiophiles everywhere.

Putting on the DOT

Andrew: I'm a newbie in the options world, having placed my first call on BCST last week (this is so that you can gauge my incompetency at options). My problem is that I have made my target goal for 1999 gains (mostly in the time-honored, trigger-happy Net way that

Barron's

deplores in

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readers when it bothers to take a side swipe at us and stop moaning about Jim Cramer). So, being I have enough already to live off of and do my art this year, I would like a little insurance on those wild west Net stocks I own. Is it possible to place an index put on an Internet index such as the DOT? Comments on the strategy? Thanks, -- Antoinette Burkett

Antoinette:

I dunno. Looks to me like you probably made out OK with that BCST trade a few weeks back. Maybe I should be asking YOU the questions.

So if I'm hearing you correctly, you've got enough gains to keep you in water colors for the rest of the year and want to protect those profits while maintaining your positions in your Net stocks. A better application for a well-placed option trade would be hard to find. Depending on the makeup of your portfolio, you've got a couple of important issues to consider.

The first is what method to use to hedge your gains. As you've suggested, you could either buy individual puts on each underlying stock or simply buy an index option on something like the

DOT. The goal is to buy options whose prices correlate well with your underlying stocks for maximum protection. In other words, buying a put on GM isn't going to do much good hedging a long position in AMZN. One could easily zig while the other one zags since they're completely different businesses and basically uncorellated. If you only own a few stocks, or if the ones you own don't match the companies in the index, you may be better off buying puts on the individual companies instead of the index.

Another issue is similar to the one you face when buying insurance. How much protection do you really need and, conversely, how much are you willing to pay for it? Think of the difference between the market price of your stock and the strike price of your put option as your insurance deductible. The higher the spread, the cheaper the option but the more you stand to lose if your stock really tanks. If you're only willing to take a small loss, you'll pay for it in terms of higher option premiums.

I'd suggest reading Dan Colarusso's

options primer and checking out the CBOE

Web site for more information, including delayed bid-ask quotes. In any case, I think you're on the right track. Even an imperfect hedge using DOT puts is going to offer you some protection from the winds of fate in the choppy e-market.

Random Musings

As a side note, the U.S. News B-School rankings came out last week (drum roll please). Purdue #20. Indiana University, #21. So for all you Hoosiers out there, all I can say is, na, na, nah, na, na. Go Boilers!

We'll see you here next week. Keep those questions rolling in!

Andrew Greta is a project manager for TheStreet.com.