36 lines
2.6 KiB
Plaintext
36 lines
2.6 KiB
Plaintext
Chapter 32: Structured Products 639
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Another major segment of ETFs are called Holding Company Depository
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Receipts (HOLDRS). They were created by Merrill Lynch and are listed on the
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AMEX.
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Options on ETFs. Options are listed on many ETFs. QQQ options, for example,
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are listed on all of the option exchanges and are some of the most liquid contracts in
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existence. Things can always change, of course: Witness OEX, which at one time
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traded a million contracts a day and now barely trades one-thirtieth of that on most
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days.
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The options on ETFs can be used as substitutes for many expensive indices.
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This brings index option trading more into the realm of reasonable cost for the small
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individual investor.
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Example: The PHLX Semiconductor index ($SOX) has been a popular index since
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its inception, especially during the time that tech stocks were roaring. The index,
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whose options are expensive because of its high statistical volatility, traded at prices
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between 500 and 1,300 for several years. During that time, both implied and histor
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ical volatility was near 70%. So, for example, if $SOX were at 1,000 and one wanted
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to buy a three-month at-the-money call, it would cost approximately 135 points.
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That's $13,500 for one call option. For many investors, that's out of the realm of fea
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sibility.
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However, there are HOLDRS known as Semiconductor HOLDRS (symbol:
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SMH). The Semiconductor HOLD RS are composed of 20 stocks (in differing quan
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tities, since it is a capitalization-weighted unit trust) that behave in aggregate in much
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the same manner as the Semiconductor index ($SOX) does. However, SMH has trad
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ed at prices between 40 and 100 over the same period of time that $SOX was trad
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ing between 500 and 1,300. The implied volatility of SMH options is 70% - just like
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$SOX options - because the same stocks are involved in both indices. However, a
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three-month at-the-money call on the $100 SMH, say, would cost only 13.50 points
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($1,350) - a much more feasible option cost for most investors and traders.
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Thus, a strategy that most option traders should keep in mind is one in which ETFs
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are substituted when one has a trading signal or opinion on a high-priced index.
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Similarities exist among many of them. For example, the Morgan Stanley High-Tech
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index ($MSH) is well known for the7eliability of its put-call ratio sentiment signals.
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However, the index is high-priced and volatile, much like $SOX. Upon examination,
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though, one can discover that QQQ trades almost exactly like $MSH. So QQQ
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options and "stock" can be used as a substitute when one wants to trade $MSH. |