V.7:7 (233-234): Option shooters vs. spreaders by Jerry Kopf

Option shooters vs. spreaders by Jerry Kopf

Option market timers and option relationship traders occupy major places in the spectrum of call and put investors. Timers or "shooters" go for the "home run" by simply buying premium (i.e., going long a put or call). Relationship traders grind out small but consistent yardage by stacking probabilities in their favor. Because they are skilled at spreading and know beforehand what an option's price "should" be, that is, its theoretical value, they capitalize on price discrepancies.

Market timers make subjective decisions based on:

News — Monthly trade and employment figures, the Producer Price Index and other external market data. A few years ago, when the M1 was in vogue, market timers keyed into Thursday afternoon's money supply figures.

Opinions — From the forecasts of newsletter advisors to predictions of the "elves" on television's Wall Street Week.

Feelings — Intuition about whether the next 50-point Dow Jones Industrial Average move will be up or down. Many market timers use charts or other technical indicators which "tell" them future market direction. Recognize that charts or waves are subject to the ability of the interpreter to read them correctly. In actuality, a subjective market call.