started, the wise-guy bet was to sell the calls. The premium was outrageous. Well, the first expiration of the DOT is just a week away, and what do we see? Panicked call-sellers trying to bring them back in to avoid the unlimited losses that a short call strategy breeds. (
doesn't receive any income from trades on the index.)
I never sell calls short, particularly ones that can't be hedged. (The top call can't be hedged because there is no call above it to buy to cut off the losses.) Just because the price of a call is outsized does not mean it should be sold. Historically, it means it should be bought. The amazing premium that these calls had when they started was indicative of the direction the index might take. (The puts, albeit expensive, were never as rich as the calls.)
The DOT has done one thing since it started: Go up. Three times I have tried to buy deep calls on the index, and three times I have failed. Each time I would have had to pay 15 points more than I thought they were worth. Each time I would have made 15 points virtually overnight.
Doesn't matter. I look at the calls closely anyway because you can use options as a "tell." (Remember, a tell is something in cards which shows you which way a player is leaning. If you don't know the terms, rent
House of Games
this weekend and you will.) The DOT calls, the very ones sold by the jokers now buying them back, were the clearest sign of underlying strength I have seen for an index. All the more remarkable is that many market players, including me, thought that the new year would bring out tax-related selling in the Net stocks that had been held back in 1998. Wrong! When the tax-related selling didn't materialize, the DOT shot up, and most out-of-the-money calls worked.
These calls weren't priced right when the index started. In retrospect, they were too cheap!
James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com. 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 TheStreet.com.