GROUNDHOGS HAVE AN EDGE ON BULLS, BEARS / BARRON´S ( RECOMMENDED READING )

Monday, September 14, 2009

THE STRIKING PRICE DAILY

Groundhogs Have an Edge on Bulls, Bears

By STEVEN M. SEARS

As September options expire Friday, Mr. Market might be spooked by his shadow.

EVERY MONDAY IS LIKE Groundhog Day on Wall Street.

Traders, portfolio managers and the Street's other tribesmen return to a new week, wondering if their weekend genuflections over the state of the markets will be justified.

Will Mr. Market, like Punxsutawney Phil, the famous weather-forecasting groundhog, see his shadow in some bit of corporate news or financial and economic data? Will the Standard & Poor's 500 Index surge higher, clearly confirming that what appears to be a recovery is just that and not a vicious head fake?

For weeks, if not months, Mr. Market has not seen his shadow, and traders and investors have been like the Bill Murray character in Groundhog Day. Every new day repeats the day before.

The stock and options markets have been stuck in a broad trading range, bouncing between two seemingly never-evolving polarities that many fear is masquerading as a recovery hidden inside a range-bound market wrapped with anxiety.

So far, equity prices have steadily ground higher, punctuated with some various reports that say the worst is over and others that say the worst is still here. Some options market makers say that is a fate worse than death because it makes pricing the volatility component of puts and calls incredibly difficult. Hedging the trades is hard, too, they say, but worry not because they are well compensated for their difficulties.

This week may begin with policy makers and President Obama and Wall Street wise men publicly ruminating about the meaning of the one-year anniversary of the late Lehman Brothers' demise, but it will end with the options market occupying center stage in a theatrical moment that even a groundhog like Punxsutawney Phil could appreciate.

All September options expire Friday. Futures on the Chicago Board Options Exchange's Market Volatility Index (VIX), which heavily influences the value of the investors' fear gauge, or spot VIX, expire Tuesday.

Here, in this massive movement, all eyes will turn to see if a bull or a bear is hidden in the millions of expiring puts and calls.

So far, neither bovine, nor Ursus americanus is hidden in the options market. September open interest, which describes all outstanding options for a particular strike or month, is modest.

"At current levels, there is not a clear preponderance for buy or sell programs, as there is a general balance between expiring in-the-money call open interest and in-the-money put open interest," says Larry McMillan, president of McMillan Analysis, a money-management and trading-advisory firm.

What to do when Wall Street's great probability lab is evenly split and offers little in the way of guidance to stock investors?

This is where convictions play an important role. Unfortunately, the bulls and bears seem to be evenly split. The key now is anticipating the pieces to the puzzle that decisively tip the balance once and for all.

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