Options Indicators Say Capitulation, Bottom, Are Still to Come
By Brian Louis
Staff Reporter
12/20/00 3:28 PM ET
Investors hoping for signs of capitulation and a market bottom won't get them from the indicators that options market pros are watching.
And because they're not showing signs of capitulation (where investors give up, dump stock in a panic and push prices horrifically lower), the market probably hasn't put in a bottom yet. To avoid a false rally, options and stock market pros like to see a total market washout before stepping up big on the long side.
"If you're looking for climactic readings, you're not getting it," said Jay Shartsis, options strategist at R.F. Lafferty in New York.
Analyst downgrades this morning, profit warnings, worries about earnings and chagrin with the Federal Open Market Committee's decision not to lower interest rates Tuesday conspired to hammer stocks again today as the Nasdaq 100, or NDX, for example, continues with its awful downdraft that has lasted several sessions.
Yesterday the FOMC left the federal funds rate at 6.5% and in its statement said it "believes that the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future." Traders are expecting the Fed to start lowering rates beginning early next year.
The market could rally considering how much selling there's been lately, but hedge fund manager Jordan Kahn of Kahn Asset Management said, "I'd be selling into it or reinitiating short" positions if that happens.
"I don't think we've seen that capitulation," Kahn added.
He listed a few options-market indicators that can point to a market capitulation, but haven't. The Chicago Board Options Exchange Volatility Index, or VIX, hasn't been sky-high lately, though it has climbed lately. When the VIX surges dramatically, it's seen as a sign that the market may be nearing a bottom. The VIX is used by stock and options traders to gauge the market's anxiety level. Generally, the VIX rises when put option buying increases on options on the S&P 100, or OEX. A put option gives the purchaser the right but not the obligation to sell a security for a specified price at a certain time. For contrarians, which the options market is heavily populated with, low readings on the VIX are bearish, while high readings are bullish.
Kahn also watches the overall CBOE put/call ratio, an indicator that includes equity and index options, which is also suggesting people aren't particularly afraid. This afternoon, the overall CBOE put/call ratio was at 0.72, a high reading but still not one that shouts panic.
To protect himself, Kahn has some hedges on long positions in stocks he owns. Traders hedge to counterbalance risk in a position they have, such as buying puts to offset a long position. One of those long positions he has hedged is in optical-networking equipment maker Ciena (CIEN:Nasdaq - news). The stock has had a rough go of it lately, to say the least. What he's done is "roll down" his put positions. Today he sold his January 105 puts in Ciena, taking a profit there and closing out the position and then buying some February 85 Ciena puts to keep the hedge on. Ciena was off $4.63 to $68.56, and about a mile off of its 52-week intraday high of $151.
