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Thursday, May 27, 2010

"Common Sense" from James Stewart on Options..Not Exactly Sensible

James Stewart's Common Sense investing column in the WSJ is like a slow motion, low decibel version of Cramer's mad money. He throws out a group of buys and sells and never presents a scorecard of how his proposed trades do, except to mention some winners. But even the with the "winners" he never specifies dates and prices for his proposed portfolio changes.

As if that were not bad enough he often presents illogical rationale for his trades (again without details). In today's column we find the following about his stock option activity:

. I bought long-term Apple call options at only a modest premium to the current price,
the above is so vague as to be meaningless
and  he writes

I also raised some cash by selling some Google put options. This is the first time I've sold puts in over a year. (Selling puts means you agree to buy shares at the strike price if they're trading below that price when they expire.) It's a strategy I recommend when option prices are high,
Now anyone knowledgeable about options knows that "cheap" or "expensive"  is only relevant in terms of the implied volatility of the options.

Stewart didnt give details of his trades (of course) but

the January 2011 apple options are trading at an implied volatility of close to 42.

The short term june 2010 google options have a volatility of 34%

So it would seem to me (and most options traders) that at first glance it seems Mr. Stewart bought the expensive options and sold the cheap ones.

In any case given that both goog and aapl have heavy weights in the nasdaq it seems highly unlikely that the options on aapl would be cheap at the same time google option prices are "high"

The implied volatility for the nasdaq (the nasdaq equivalent of the VIX) is the vxn. The volatility on the vxn is very close to that of apple and it is clearly at historically high levels. Where it will go from here is certainly an open question,

But one thing that is pretty sure to me:  the likelihood that options on apple "trade at a modest premium"  at the same time the prices on googl options are high under current market condiions is zero.

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