Let The Trader Beware! (Or Here Come The Lawyers)

  • November 16, 2000
  • Tony Saliba

 As
Florida Secretary of State Katherine Harris decided to deny requests by the
Florida counties to adjust their vote tallies, some pundits saw a beginning of
the end to this mass of confusion known as the Presidential Election of 2000. 
Others, however, saw the decision as merely an invitation for the lawyers
to take over and ply their trade, with the tumult and chaos of legal wrangling
taking center-stage.  Whatever the
outcome, we market watchers council restraint…don’t think for a moment this
roller coaster ride in the markets is over. 
We re-iterate our point from yesterday that safety lies in lower-priced
options, while danger can be found in shorting “fat” options in an attempt
to pick up the premium.

The
options market reacted to another “decision” yesterday, when the Fed
declined to raise rates. Because this action did not change market bias, it led
to a moderate sell-off yesterday and a corresponding increase in volatility.
Remember, option volatilities naturally increase in a downward move in the
market, and decrease in an upward move.

 
In the overall market, call sellers outnumbered buyers 2:1, while put
sellers equaled buyers at a 1:1 ratio. Four of our five typical volume leaders
today maintained their pre-open preeminence: QCOM,
CSCO,
DELL and
MSFT. 
AMAT sprang into the top five after its better than expected earnings
yesterday.   Note that pre-bell QCOM
put sellers lead buyers 2:1, while CSCO,
call sellers lead buyers 5:2.   AMAT
call sellers outnumbered buyers 2:1.  The
Healthcare sector exhibited a slight imbalance between call buying and selling,
with selling leading buying 3:1.  Most
Healthcare paper movement is in Biotechnology and Drugs. In Major Drugs, call
sellers are leading buyers 6:1.

After
the first hour of trading, in the overall market call buying and
selling evened out at 1:1.   Put
sells are
leading buys at 3:2. Top
five volume leaders have shifted: BRCM, 
AMAT,
QCOM,
INTC and
PMCS comprise the top-tier. 
PMCS
saw increased paper movement upon its downgrading by key analysts. BRCM 
has a 3:1 call buy to sell ratio.
AMAT
shows strength in call selling, with a 3:1 ratio
over buys.  INTC
put buyers are coming out in force, leading 3:1 over sellers. Healthcare call
buying has evened out with selling, but Major Drug put buyers lead sellers, now
at 2:1,  while the call sellers still lead buyers, but at a more modest
ratio of 2:1.

We continue to hold that we probably wont see a settled
market at least through expiration. The attentive trader may find pockets of
opportunities throughout this electoral joy-ride, but caution and prudence must
temper enthusiasm.  Options players
should expect sharp moves in the market, and higher than normal volatility. 
We would not look to short any volatility right now.Â