SECTOR WATCH: Software Stocks Start Moving
Email This Article
Print This Article
SubscribeMOST POPULAR ARTICLES
- Kaeppel's Corner: Twisted VIXter
- Closing Wrap-Up, July 29
- Morning Watch, July 30
- Market Trends: Platinum Probability Bands
- Economic Watchdog, July 29
- Midday Action: July 29
- Morning Watch, July 29
- Growth Stock Swing Option: July 28, 2010
- Closing Wrap-Up, July 30
- Real-World Trading: Using Calendar Spreads in Sideways Markets, VII
- Real-World Trading: Using Calendar Spreads in Sideways Markets, VII
- Kaeppel's Corner: Twisted VIXter
- Real-World Trading: Using Calendar Spreads in Sideways Markets, Part VI
- Real-World Trading: Using Calendar Spreads in Sideways Markets, Part V
- Fundamental Focus: Insuring Your Portfolio
- Trading Calendar Spreads with Options
- REAL-WORLD TRADING: Five-Minute Success Formula
- Midday Action: July 30
- AU Editorial: Money and Holidays
- Hot Shots, July 30: Straddling a Breakout Performance from Within
- Economic Watchdog, July 29
- Market Trends: Platinum Probability Bands
- Midday Action: July 29
- Growth Stock Swing Option: July 28, 2010
- AU Market Review: Market Action
- Midday Action: July 28
- Real-World Trading: Using Calendar Spreads in Sideways Markets, VII
SPONSORED LINKS
July 21, 2004
Volatility in the software sector is beginning to rise. Wednesday, the group moved higher after Microsoft (MSFT) announced a share buyback along with plans to increase its dividend. The entire sector moved higher on the news. In addition, with Wednesday’s midday gain, the GSTI Computer Software Index ($GSO) has now risen during the past three trading sessions. However, prior to this week’s advance, the group was among the worst performers and many stocks in the sector had suffered large percentage losses. Therefore, it appears that turbulence in the sector is on the rise, and traders looking for stocks with increasing volatility may want to look to the software sector for potential trading opportunities.
Software stocks rose on Wednesday after Microsoft said it would pay a special $32 billion one-time dividend and buy back up to $30 billion of its own shares [see Breaking News: Microsoft Announces Special Dividend and Share Buyback, by Fred Ruffy, 7/21/04]. The company also announced plans to boost its annual dividend to 32 cents. The move from the world’s second biggest company by market value represents the largest cash distribution in history. The stock rose $1.00 to $29.32 a share on the news. The GSTI Computer Software Index, which was already up 3% on the week, also moved higher midday Wednesday.
Although software stocks are performing well during the past few days, they have been a drag on the technology sector this year. The table below shows the performance of various technology indices during the past month (from June 18, 2004 to July 20, 2004). The Nasdaq 100 Index ($NDX) fell nearly 3% during that time. The Software Index slipped 7.3% and has been the worst performer. Furthermore, as we can see from the last few columns, volatility has been rising lately. That is, the 20-day Statistical Volatility is much greater than its 50-day volatility. The rise in the 20-day indicates that short-term volatility has been greater than the longer-term volatility, which is also a sign that software stocks are beginning to trade more erratically lately.
|
| One Month | Historical Volatility | ||
| Symbol | Performance | 50-day | 30-day | 20-day |
GSTI Computer Software Index | -7.28% | 23% | 25% | 29% | |
AMEX Box Maker Index | -6.56% | 20% | 24% | 24% | |
PHLX Semiconductor Index | -6.54% | 32% | 33% | 35% | |
CBOE Internet Index | -5.71% | 27% | 26% | 28% | |
Nasdaq 100 Index | -2.98% | 17% | 17% | 17% | |
AMEX Networking Index | -2.42% | 29% | 30% | 32% | |
S&P 500 Index | SPX | -2.32% | 10% | 8% | 8% |
AMEX Biotech Index | -2.07% | 22% | 22% | 23% | |
GSTI Computer Hardware Index | -1.53% | 21% | 22% | 24% | |
NA Telecomm Index | -0.42% | 14% | 13% | 14% | |
AMEX Disk Drive Index | 1.01% | 34% | 36% | 39% | |
The chart below shows the increase in volatility within the software sector graphically. On the top half of the chart we can see the performance of the GSTI Computer Software Index along with the decline it has suffered throughout most of the year. The index fell sharply during the first half of July after earnings jitters whacked a number of stocks, including Veritas Software (VRTS), Computer Associates (CA), and Siebel Systems (SEBL). Furthermore, as we can see from the bottom half of the chart, the historical volatility of the index has risen sharply this month. In fact, the 20-day is now approaching its highest levels in more than a year.
Source: Option Gear
It appears that at least one strategist expects the volatility in the software sector to continue during the next few months. On Monday, July 19, a trader opened a large straddle using the GSTI Computer Software Index. With the index near 135, someone purchased 1,930 of the GSO September 140 calls and 1,930 of the GSO September 140 puts. Options on this index rarely see much trading activity and the unusual volume in these near-the-money options Monday was probably part of a straddle purchase, which is a bet that the software index will make a large percentage move between now and September option expiration.
Since the lack of trading volume and liquidity in the GSTI Computer Software Index makes it an unappealing trading vehicle to most option traders (with the exception of the aforementioned straddle buyer), some options strategists turn instead to the Software HOLDRS (SWH) to implement trades on the sector. This fund holds a basket of different companies, including Microsoft and seventeen other software stocks. Trading is more active in the Software HOLDRS options when compared to the GSO options. Wednesday morning, for instance, following the news of Microsoft’s dividend distribution, more than 8,500 SWH options traded. Therefore, options traders expecting the volatility in the sector to continue can implement strategies on individual companies or the Software HOLDRS. For example, bull call spreads are an option if the outlook is bullish; bear put spreads if bearish; or straddles and strangles if the volatility is expected to continue, but the ultimate direction is uncertain.
Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
Visit Fred Ruffy’s Forum
© Copyright 1995-2010 Optionetics. All rights reserved. This material is for personal use only. Republication and re-dissemination, including posting to newsgroups, is expressly prohibited without the prior written consent of Optionetics. Optionetics is a registered trademark of Optionetics, Inc.