Settlement Rally Should Bring Vols Down

  • December 5, 2000
  • Tony Saliba

Those of you who have been following this column since its
inception a few weeks prior to the election are aware that our strategy has been
to avoid heavily selling premium. We have advocated using vertical spreads when
a directional bias has been expected, a strategy that is very useful and that we
use often. Moreover, we advocated
buying low cost (cheap, as we would call them) options before the election, as
volatility began to whipsaw.

Finally, we have strongly emphasized the impact of all
the legal wrangling and political maneuvering of Election 2000 on the
uncertainty of the markets. We have pointed out that in general, the market (and
thus options volatilities) has moved in step with the pronouncements from
Florida.

These two basic strategies, without specifics, have been
working. Whether you chose call verticals or put verticals, both have been
better strategies than straight puts or calls. The call strategy worked for the
first two swings, and if you missed them, you still have a shot today and
through expiration. The put strategies have been profitable overall, staying in
through last week when we said to lighten up on them and first start selling
premium.

As for our “Cheapies,” they have allowed you to take
advantage of the expansion in vols, the drop in the market in general and the
rolling strategy of Nov. 24. If you chose calls, you should not
have lost much, but the rolling of those calls was the right thing to do on the
24th, as the rally since Friday should have lifted those units.

With yesterday’s two crucial judicial rulings behind
them, market players seemed eager for a rally today.Pre-open
order volume was heavy this morning. Overall, call sellers led buyers 3:2, and
put sellers led buyers 2:1. Top five order volume leaders were as follows:
(
INTC |
Quote |
Chart |
News |
PowerRating),

(
CSCO |
Quote |
Chart |
News |
PowerRating),
(
QCOM |
Quote |
Chart |
News |
PowerRating),
(
MSFT |
Quote |
Chart |
News |
PowerRating) and
(
EMC |
Quote |
Chart |
News |
PowerRating). In pre-bell activity, INTC put sellers
outnumbered buyers 2:1.
(
RFMD |
Quote |
Chart |
News |
PowerRating) call
buyers trumped sellers 2:1. ORCL
call sellers led buyers 2:1.

The
first-hour

volume remained heavy. Overall, call sellers outnumbered buyers 2:1,
while put buyers and sellers were even at 1:1. The top five volume leaders
were: CSCO, INTC, QCOM,
(
NOK |
Quote |
Chart |
News |
PowerRating) and

(
SUNW |
Quote |
Chart |
News |
PowerRating). NOK put sellers led buyers
2:1. CSCO call sellers led buyers 2:1. ORCL call sellers outpaced
buyers 4:1.

The action today bodes well for the strategies we have
advocated. Stay in liquid names and don’t lift legs… trade those combinations
as packages. As the political news plays less of a role in the market
attitude, we will begin to see the aspects of historical volatilities and
seasonal factors bear on options prices. Stay spread.