The Smart Profits Report: Issue #215
Thursday, June 9, 2005 Index Options - A Billionaire's Trading Tool Anyone Can Use
By Karim Rahemtulla
Chairman, Mt. Vernon Research Most investors think that index options plays are tied only to individual stocks. If you like Google, you buy a call. Fact is, you can now buy options based on whole sectors, indexes or funds... not just individual companies. If you are a bond bull, you can buy an option on a bond fund, for example. These options can be extremely powerful to you as an investor. You can use them to accomplish a whole range of investing goals that single-stock-based options just cannot provide. Let me explain... How to Profit From Your "Market Wisdom" It seems that every day, traders can choose from an ever-increasing number of options - name an investment and someone somewhere is selling options on it. With index options, for example, you can trade your broad market opinions easily. Think the market is going to tank, buy a put on the Dow... or one of the S&P indexes... or the Nasdaq... or even the Fortune 500. (Or if you think we're headed for a recovery, you can buy calls on those same indexes.) Hate energy stocks? Short the energy ETF (Exchange Traded Fund). How about chips - not the kind you munch while watching sports, but the type that operate everything from your computer to your washing machine? If you think semiconductor chips are going to be in high demand, you can trade the SMH, a basket of the top semiconductor stocks. Index options are ideal for positions you want to take for strategic reasons when you don't want to own shares for the longer term. And if you think your portfolio lacks a certain balance, but you don't have a particular stock in mind to fill the hole, you can just as easily buy a call on one of the sector options and participate in a rally without adding a single stock to your holdings. Hedge Like the Billionaires These "other" options are particularly suitable for one of the most conservative option plays, too -hedging. If you think your portfolio of tech stocks is vulnerable, but you don't want to sell your shares, an easy-to-do put on the QQQQs - which is composed of the top 100 Nasdaq stocks - would bring you gains in your options to offset the losses in your stocks if you were right. This is exactly the kind of safety-valve mechanism the ultra-rich access using hedge funds... Let's say you want to hedge a particular portion of your stock holdings, such as all of your NYSE stocks. You can do it just by going short with a put on the corresponding index or fund... All this means you no longer have to risk thousands of dollars shorting stocks - with the unlimited risk that involves - to insure your portfolio against losses or simply to take a bearish position. Index Options As Powerful Tools Are New - But Valuable The message behind this explosion in options investments is: If there is demand, someone will create an option for it and one of the exchanges will list it. As an individual investor this has greatly expanded your alternatives in just a few years. It might be time for you to start taking advantage. Today's Smart Profits Cribsheet - For more information on ETFs and their options, visit the www.amex.com website.
- Check out the Smart Profits Glossary for option term definitions like "ETF" or "QQQQ."
Good trading, Karim Related Articles:
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