Playing The Economy's Bumps And Straightaways

Think you have a pretty good notion of how the U.S. economy will fare? Savvy investors with deep pockets can put their instincts to the test by trading options on a pair of broad market indexes tagged to blue-chip stocks sensitive to economic cycles or relatively immune to the swings.

On Sept. 21, the American Stock Exchange launched call and put options trading on Morgan Stanley's cyclical and consumer indexes. Developed in 1992 and assigned a benchmark value of 200, each contains a basket of 30 stocks. The cyclical index, designed to do well in an economic expansion, tracks industrial heavyweights such as Caterpillar, Ford, and Honeywell. The consumer index--stocks that remain stable in a bumpy economy--is filled with food, tobacco, and personal-products companies such as Gillette, McDonald's, Philip Morris, and Rubbermaid.

A number of index options already exist, covering everything from the Standard & Poor's 100 and midcap stocks to biotechnology companies. By betting on an index, you hope to isolate the trends that will cause the market to move a certain way, without having to be right about an individual stock. Options may also serve as insurance against a decline in stocks you already own, says Bob Gordon, president of Twenty-First Securities, a hedging strategy firm. Investors who took a beating on consumer-products shares might have softened the blow if they were able to buy puts on the consumer index earlier this year.

LIGHT INTEREST. So far in 1993 through Sept. 27, the Morgan Stanley cyclical index is up 14% against a 10% decline in the consumer index. The options on the indexes have expiration dates on the third Friday in October, November, and December of 1993, and March and June of next year. As of the AMEX launch, the cyclical index stood at 278.12; the consumer index opened at 184.18. You could recently buy an October 175 call on the latter for a premium of 10.25, or $1,025. If the index rises to 190 by the strike date, you would make a profit of $475. Premiums are influenced by where the index is in relation to the strike price and the amount of time remaining until the expiration date.

Historically, investors have viewed specialized index plays with caution--and indeed, early institutional interest in Morgan Stanley's two has been light. But some experts do see value in them. Says Bernard Schaeffer, editor of The Option Advisor newsletter: "I'd take a look at them if I had a strong view on those sectors of the economy."

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE