37 lines
2.7 KiB
Plaintext
37 lines
2.7 KiB
Plaintext
520 Part V: Index Options and Futures
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are not available with stock options. For example, if one were to try to use options to
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construct a strategy based on his expectation of interest rate movements, he could
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use T-Bond futures and options, which is the easiest way. However, if he were to try
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to remain with stock options, he would probably be forced to do something with util
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ity stocks or illiquid interest rate options - a clearly inferior alternative.
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Trading in index options can be very profitable, but only if one understands the
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risks involved - especially the risk of early assignment in cash-based options. The
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advantages to being able to "trade the market" as opposed to trading one stock at a
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time are obvious: If one is right on the market, his index option strategies will be
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profitable. This is superior to stock-oriented buying whereby one might be right on
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the market, but not make any money because calls were bought on stocks that didn't
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follow the market.
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The strategist should consider all of his alternatives when trading in these mar
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kets. If he is bullish, should he really be buying OEX calls? Maybe futures calls on
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the S&P 500 are better. Perhaps the OEX is expensive with respect to the NYSE and
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the NYA calls would be a better buy. In fact, perhaps all the calls are so expensive
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that stock options are the best buy. The ideas presented in this chapter lay the
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groundwork for the strategist to explore these questions and make the best decision
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for his investment strategy.
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Finally, keep in mind that the index futures and options comprise a very diverse
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set of securities. They can be put to work for the investor, the trader, and the strate
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gist in a multitude of ways. The only practical limit is in the mind of the user of these
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derivative securities.
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PUT-CALL RATIO
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Generally, we have not been concerned with technical trading systems in this book.
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Not that they aren't important, they are just in another category of investments other
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than option strategies. However, the put-call ratio system is so closely related to
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options that its inclusion is worthwhile.
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The put-call ratio is simply the number of puts traded divided by the number
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of calls traded. It can be computed daily, weekly, or over any other time period. It
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can be computed for stock options, index options, or futures options. Sometimes it
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is computed using open interest instead of volume. Another way to compute the put
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call ratio is to divide the dollars spent on puts (sum of each put price times its trad
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ing volume) divided by the dollars spent on calls (sum of each call price times its
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trading volume). If it is calculated daily, one usually averages several days' worth of
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figures to smooth out the fluctuations. |