It's football season and time for the old "option" play - with Cisco Systems, IBM and Hewlett-Packard lining up in the backfield.
Options are a riskier way of investing on stocks. Essentially, options allow you to buy or sell a company's stock at a stated price and a stated date. Investors who bet the stock will go down buy "puts" giving them the right to sell the stock at a higher price. Investors who think a stock will go up buy "calls" which give them the right to buy the stock at a lower price on a specified date. Expiration dates on options could leave investors holding the bag, though, and losses can be severe
But Goldman Sachs thinks that a technology play involving options on Cisco and HP are a great call right now. Prices for options contracts on both are the cheapest they've been in five years, Goldman Sachs says.
In a research report, the investment firm explains it all for you: "Implied volatility, a measure of expected price swings and the key gauge of options prices, is the lowest for technology stocks since 2003 when compared with the Standard & Poor's 500 Index, the strategists said. It may increase as slower economic growth and a stronger dollar damp demand for computers."
``This provides an attractive entry point to buy options to express views in the tech sector,'' Goldman options strategists John Marshall and Stuart Kaiser write. ``The recent dollar strength and slower global GDP growth may provide catalysts for higher volatility at the sector level.''
As Marshall and Kaiser point out, stock volatility usually falls as share prices increase. Computer-related companies in the S&P 500 gained 2.6 percent since the end of June compared with a 0.9 percent drop for the overall index. The difference in volatility between the S&P 500 and the Nasdaq-100 Index, composed mostly of technology shares, has narrowed by half over the last month.
It's the larger tech companies like HP, Cisco and IBM that should benefit most from such market trends, Goldman says. Citing HP's 14% spike on Q3 revenues and with increased global demand for the products HP makes, like notebook computers, then HP should continue to see its stock rise.
If you haven't played the options market, be careful - the risk rises dramatically in options investing. But the payoff can be huge. And if Goldman Sachs is right, then an options play in a big computer maker can be a big winner.