thestreet.com. Options Buzz: Now, the Betting is on Volatility
[A nice bullish sign similar to the heavy ASND put buying late last week...]
thestreet.com
By Dan Colarusso
Senior Writer
8/4/98 6:01 PM ET
By 4:25 p.m. EDT, there was hardly any background
noise on the telephone call into the S&P 100 -- or OEX --
options pit at the Chicago Board Options Exchange.
Still in the pit, ruminating in the aftermath of an almost
300-point drop in the Dow, veteran OEX trader Van
Hemphill said it was the busiest day he'd ever seen, and it
didn't feel good.
"It seems like the public is getting out, they were looking
to buy puts today," said Hemphill, a managing principal at
Lakeshore Securities. "They were scrambling to cover."
The scramble in OEX, a key contract for options traders of
all sizes, was understandable as the index fell 20.16 to
close at 525.64. The CBOE's volatility index, which is tied
to OEX put activity, rose slightly more than 26% to close
at 33.10, the highest it's been in recent history.
What Hemphill also said he saw late in the session as the
rolling stone of the Dow picked up that downhill
momentum was institutional investors selling
at-the-money OEX straddles -- puts and calls at the
August 525 strike price -- for $28. That means the index
must move 28 points in either direction by the third Friday
in August for the buyer to simply break even. That kind of
activity, Hemphill said, suggests that some bigger players
decided that they weren't "taking any shots. They were
betting on volatility." Essentially, they saw the opportunity
to make money speculating on how much the market will
move without having to commit to a direction.
The spike in the VIX was particularly telling. The VIX had
gone as low as 16.88 in mid-July before slowly climbing to
22.57 over the next two weeks. On Monday, it closed at
26.03, where it began today's ascent. The VIX is often
seen as a contrarian indicator. When it gets too low,
traders interpret a dangerous level of complacency and
when it is higher -- in the mid-20s or above -- they often
see enough prudence to portend a rally.
At the end of the day, more than 8,200 OEX August 525
puts had changed hands and rose in price 8 3/4 ($875) to
13 1/4 ($1,325). The identically struck calls fell 13
($1,300) to 15 ($1,500) on volume of just 410 contracts.
The busiest OEX strike was the August 540 options,
where calls were in the money when trading opened and
way out of the money when it closed. Those calls, which
traded 12,000 contracts, lost 9 1/4 ($925) to close the day
at just 7 1/4 ($725). Volume of more than 14,000 carried
the August 540 put price 12 3/8 ($1,237.50) to 21
($2,100).
Around Wall Street, other options pros used descriptions
common to the kind of carnage the market saw in the
wake of today's nearly 300-point drop in the Dow. "A
nasty, nasty selloff," said Swiss American Securities'
Scott Fullman. "Can you say, 'Bleeding,'" cracked a trader
at online brokerage Mr. Stock.
As wave after wave of sell programs heaped trouble on the
market, options traders sought refuge in puts, driving up
the prices of those options considerably as shorts who
couldn't get their paws on shares also began looking to
the puts.
Swiss American's Fullman found it surprising that OEX
call volume was as high as the put volume. "There's a
combination of factors: some people were looking for a
bottom and some were looking to hedge long positions
and sold calls when the puts got expensive," he said.
He did, however, say he saw some opportunity in the
minefield that the market has turned into. Investors can
write puts on companies that they find have solid
fundamentals, take in a revved-up premium and end up
owning a good stock at a depressed price if the struggle
continues. |
