Why David Tepper is bullish on options

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People listen when David Tepper talks, and last week was no exception when he was interviewed on CNBC.

The founder of Appaloosa Management was widely quoted for his bullish remarks about the stock market's prospects last Monday even in the face of fiscal-cliff uncertainties. But some of Tepper's most interesting remarks involved his use of options.

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Tepper discussed how he looks at volatility levels as a tell both for when to buy and what kind of options to purchase. He discussed the use of " skew ," though he didn't use that terminology.

Yet I do have to take issue with some of his assessments. For instance, he talked about how high CBOE SKEW Index was, when it was actually near its lows at the time. Tepper also said he thinks that the possible downside is around 2 percent to 3 percent if we go off the fiscal cliff, while I believe that the potential drop is multiples of that.

But the former is a matter of data and the latter of opinion. What I find most interesting is how extensively he is using option strategies and volatility data.

Appaloosa is a $16 billion hedge fund that has seen returns of around 25 percent for the year. Its focus on options is an indication of their importance to insitutional markets. Combined with IntercontinentalExchange's purchase of NYSE Euronext on Thursday--a deal widely viewed as driven by the derivatives business , not stocks--interviews like Tepper's highlight the fact that options are increasingly the go-to market. 

(Screen shot courtesy of CNBC .)

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