Pessimism Plays: Contrary Options

02/20/2004 12:00 am EST

Focus:

Chris Johnson

Editor, The Winning Edge

The Options Industry Council panel at each Money Show is designed for sophisticated investors, who understand the risks and rewards of options. Chris Johnson, from Schaeffer's Investment Research, explains the role of contrary opinion in options, and his latest bullish stock picks.

"We have four recommended stocks that should be of interest to those seeking bullish option positions. Each of these stocks are currently exhibiting properties of stocks that have building pessimism among investors. Signs of this pessimism can come in a number of forms. First, this pessimism can be seen in a rising Schaeffer's Open Interest Ratio (SOIR). A rising SOIR indicates that investor pessimism is building as the ratio of puts to calls increases. Similarly, a rising volume put/call ratio indicates that option volume for a company is favoring puts rather than calls. Short interest is also evaluated in order to assess investor sentiment. High short interest or short interest ratios are indicative of the negative sentiment that often indicates upcoming strength for a stock.
 
"Why do we look at negative sentiment? Quite simply, if the public sentiment is negative, it is often a sign that 'potential selling' has been exhausted from the stock. When this is the case, and the stock is both fundamentally and technically strong, the stock often rallies. Here are four stocks that exhibit these characteristics, and as a result should be viewed as bullish stocks for options players: Cree Research (CREE NASDASQ), a technology company that develops semiconductor materials; Cendant (CD NYSE), a leading player in real estate and travel services; investment banker, Bear Stearns (BSC NYSE); and delivery firm, United Parcel Service (UPS NYSE)."
 

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