$Stock*Shop*Charts*News*Option$

[Stock Lobster]

Barrons: Traders Rue the Passage of 'Obamacare', buying PUTS against a crash

By STEVEN M. SEARS |
The Striking Price | TUESDAY, MARCH 23, 2010

Defensive options trading has jumped as some investors gird for higher taxes and more Democratic Party success.

WHEN HISTORIANS WRITE about Congress' passage of a national health-care plan, perhaps a scribe or two will quote Jerry Della Femina, a fixture in the wealthy beach town of East Hampton, N.Y., as a spokesman for Wall Street.

The legendary advertising executive declared in Tuesday's New York Post's Page Six gossip column that he is selling his oceanfront mansion "before President Obama decides to redistribute any more of my wealth."

He thinks his house is worth $40 million, and noted that he turned down a $32 million offer six years ago.

Like Della Femina, many of the financial market's most sophisticated traders are agitated by the health-care plan. This is reflected by a sudden, and surprising, increase in investors buying defensive put options in anticipation of another stock-market crash.

Such trading may seem reactionary and a bit over the top. After all, the stock market has been recovering quite nicely in recent days amid expectations of an improved economy.

But Della Femina's diatribe crystallizes the fears and frustrations of many people. "The guy with the $40 million crib," as one trader referred to him, became the everyman rich man in an ongoing conversation of how President Obama is out to get the wealthy.

"I'm not one of these $40 million-a-year guys that can hide money in Lichtenstein," the head of options trading at a major international bank barked into the phone. "All you can do is just shrug your shoulders because either things get cheaper or you ask for more money."

This trader then started reviewing state and federal taxes paid on part of his 2009 pay package. The federal government clipped him for about 35%, New York State took 11%, and Medicare grabbed another 1.5% or so.

"This check was north of a million dollars, and I gave the government over $600,000 -- that's a lot of money" he said.

Indeed, the emerging view on Wall Street seems to be that "Obamacare," as they commonly refer to it, is another federal monstrosity that is more difficult to evaluate than the plan that rescued the financial system from collapse.

And so in the absence of clarity, health-care reform seems to have increased fear among very wealthy investors as evidenced by the sudden reawakening of the options market's doomsday machine.

On any given day, trading is brisk and calm in the Standard & Poor's 500 index andStandard & Poor's Depositary Receipts (SPY). Investors of all sizes and pedigrees use these products to reduce the risk of owning stocks.

But on Monday, trading sentiment seriously darkened in ways not seen since the darkest days of the credit crisis. "Crash puts," as Jefferies & Co.'s derivatives desk characterized the activity in a note to clients, were active Monday in the S&P 500 index and Standard & Poor's Depositary Receipts, the index's exchange-traded fund options to hedge portfolios.

With SPY around 117, an investor bought 30,000 June $90 puts and 35,000 May $94 puts. Someone also bought 40,000 May 950 puts; the index was recently at 1165. Today: a broker in the S&P 500 index pit at the Chicago Board Options Exchange said trading had once more turned quiet.

Added up, the sentiment and trading activity reinforces the uneasy fact that some of the best financial minds on Wall Street have no idea what to do.

"It's a world of punters right now," says Jim Strugger, the derivatives strategist at MKM Partners, an institutional brokerage firm in Greenwich, Conn.

In the absence of clarity about the economy, or even the next sector rotation in the stock market, sophisticated investors are protecting what they have, and focusing on whatever it is they can find that is concrete. This helps to explain the motivations for the recent interest in "crash puts," and the strong focus on using options to capture dividends.

On the first day investors had to respond to the health-care plan, many people thought health-care companies would dominate trading in the stock and options market. Ironically, a cigarette stock, Philip Morris International (PM), dominated the options market.

More than 800,000 January $30 and $40 calls traded, equivalent to some 80 million shares, or roughly 11 times the stock's average daily volume over the past three months, according to a report from MEB Options, an institutional brokerage firm in Chicago.

The trading volume in Philip Morris International was massive, and supports a perception that using options to scalp dividends has dramatically increased in recent months as traders and investors struggle to post gains. Philip Morris' quarterly dividend is 58 cents, or $58 per 100 shares. (One options contract equals 100 shares.)

"Market conditions are very challenging," says Michael Schwartz, Oppenheimer & Co.'s chief options strategist. "Dividend-capture trades are an intriguing way for professional traders to make a high return with little or no risk, which is very rare in the current market."

Comments: [e-mail]

http://twitter.com/smsearsBarrons



http://online.barrons.com/article/SB126929187122766119.html?mod=BOL_hpp_dc