OPTION PLAYS

[knotagain]

According Larry McMillan, all option indicators are pointing to a rally. Check it out:


Stock Market - December 29, 2000


The equity-only put-call ratios finally gave simultaneous buy signals last week. These were confirmed by buy signals in the $OEX weighted and NASDAQ-100 ($NDX) weighted put-call ratios. The breakdown of the equity-only ratio into its NYSE and NASD components shows that both of those are on buy signals as well. All of the above ratios have shown a slight "blip" upward in the last day or two, but at this time it isn't enough to cancel out the recent buy signals.

Meanwhile breadth has been terrifically positive, and that in turn has given us the highest oscillator reading since October, 1998. Does that date ring a bell? That was the previous most oversold state that we've seen in years, and when the market finally started to rally out of that condition, a massive overbought situation occurred then (the oscillator actually went to +400). Overbought conditions at the beginning of strong rallies are to be expected (even welcomed). Back in 1998, the Dow rallied another 700 points from the time the oscillator first rose above +200 until some cooling off occurred. Thus, while I rue having waited for confirmation from the $VIX before buying "the market" (a confirmation which, by the way, was not forthcoming until five days after the put-call ratios gave buy signals), our interim hotline update recommendation to buy $DJX calls was activated on Thursday morning (we bought the Jan 106 calls, DJVAB).

Index option implied volatility, as represented by the CBOE's Volatility Index ($VIX), has not declined much. Usually, when a good, sustainable, bullish move gets underway, $VIX drops precipitously from its spike highs. This time, $VIX has grudgingly retreated from the highs registered last week. Overall, things are bullish, but as is often the case there are some "holes" in the bullish argument. For now, though, we will remain bullish unless the put-call ratios retrace themselves and register new highs.

McMillan on Options
by Lawrence G. McMillan
http://www.amazon.com/exec/obidos/ASIN/0471119601/qid=946231...