For some money managers, a singular focus on shorting may have become an unhealthy -- and unprofitable -- obsession. In light of the recent market action, it may make sense for bears to pick up some calls to hedge against further rallies. In fact, in a recent column , Jim Cramer proposed using options -- specifically calls -- to provide some upside protection. But that's not happening yet, according to Mike Schwartz, chief option strategist with Fahnestock's Oppenheimer division. Schwartz has seen "only a minimal" amount of calls being purchased to hedge short positions.
In the Bear Cave
Cramer said recently that he expects to see money rotating into large-cap industrial names and thinks these stocks might outperform small-cap and technology stocks over the next few months. On Tuesday, Prudential issued an upgrade on a host of industrial companies, including some that Jim named, such as Honeywell ( HON) and Dow Chemical ( DOW). Because most of these stocks have relatively low betas and sport correspondingly low implied volatilities, their options prices are fairly inexpensive. Using the leverage that options provide could offer a great opportunity to play catch-up for individuals or money managers who are underinvested or missed some of the current rally. For example, with Dow Chemical -- now trading at roughly $32 a share -- you could buy the September 30 call, which is trading at $3, and the September 35 call at 60 cents. While buying either strike independently provides great upside exposure, I think buying the spread (buy the 30 call and simultaneously sell the 35 call) for a net debit of $2.30 is a good alternative. The maximum profit of $2.70 (a 117% gain) is achieved if Dow climbs to $35 by the September expiration.