Lehman Brothers is pitching to customers a strategy designed to profit from low near-term equity volatility and an expected longer-term upswing on the Nasdaq 100 index. Paul Lieberman, v.p., equity derivatives and quantitative research at Lehman in New York, said the firm recommends selling short-term at-the-money, or nearly at-the-money, straddles, to finance the purchase of longer-dated at-the-money, or nearly at-the-money, calls. The investor wins if the index stays range bound in the near term, and then rises. The straddles and calls can be purchased and sold via the over-the-counter or the listed market.
Selling short-dated straddles allows the investor to profit from the Nasdaq 100 staying range bound in the near future. Volatility has been high recently, so "on a probabilistic level, volatility should be lower in a month's time," Lieberman explained. In the longer term, the market is likely to recover from its current slump. Investors might consider selling Nasdaq straddles expiring in April struck at 1,800 and buying Nasdaq calls maturing in September struck at 1,800. At press time, the Nasdaq 100 index was trading at around 1,739. Its 52-week low, which occurred March 12, 2001, was 1,684.64. Its 52-week high, which occurred on March 27, 2000, was 4,704.73.
