Friday, August 31, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

When John Vogel, the founder of Vanguard Funds, says that in his 50 years of investment experience he can't recall this type of volatility, it means something. He is one of the industry’s innovators and you would think that he has seen it all. Huge day-to-day reversals have become the norm. From a trader's perspective it means one thing – uncertainty.

The bulls are very strong in their conviction and they believe that the current decline represents a fantastic buying opportunity. They point to the low unemployment rate, solid earnings growth, global expansion, and relatively low interest rates as signs of strength. Most quantitative models show that stocks are an attractive value.

The bears also have a long list of items to substantiate their bias. They point to increasing debt levels across the board (federal, state, municipal, personal) and they believe the credit squeeze is just beginning. From 2000 – 2005, almost 50% of the employment growth came from the housing sector. This number includes lenders, realtors, construction workers... everyone. They believe that the sub prime woes will continue to spread into other areas and the unemployment rate will rise. They also believe that hedge funds are highly leveraged and that the current credit crisis could force another round of liquidations. In a worst case scenario, they believe that some of the “fluff” will be taken out of the emerging market run up. Once profit taking sets in, that could have a cascading affect as investors run for cover.

Personally, I'm going to stay out of this fight. When a winner emerges I will know who to back. In the meantime, the implied volatilities are very high and option selling strategies make sense. This is a time to rely on stocks with relative strength/weakness and to keep your distance from the action.

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