TSC Options Buzz: Call Buyers Nip but Put Trading Carries the Day
By Dan Colarusso
Senior Writer
8/31/98 6:29 PM ET
The last time options traders saw this
much volatility, an impending clash with
Iraq's Republican Guard was the
market's biggest concern.
Tomorrow, another type of battle will be
joined. Lost in the clamor of the Dow's
rattling 512-point drop today, call buyers made their
presence felt in the options market. At stake now is the
territory between Dow 7500 and where speculators can see
it bouncing.
Put prices that rose to historic levels on the back of the
summer's ever-increasing volatility are reminiscent of the
uncertainty leading up to the 1991 Gulf War. Some traders,
however, noticed call buyers making their presence known
today, even as the market took it's 3:30 turn for the worst.
"This really is a classic trading situation," said Todd Raarup,
an options pro from Arbitrade. "There are those who think
this is a bottom who are buying calls and those who think
the volatility will continue and are buying puts." Today,
Raarup said, he saw both types of activity in the Chicago
Board Options Exchange trading pits. "You have to go
back 10 years to see this kind of volatility. What's different is
that usually with volatilities this high, people are selling
options. This time they're buying puts and calls," he said.
Volatility is a key component in options pricing and also
frequently is used as a key sentiment indicator by options
analysts.
It's tough to talk about optimism in the face of a drop as
large as today's but traders said they saw call buyers on
several key equity "names" such as Home Depot
(HD:NYSE) and Dell (DELL:Nasdaq). It may be ill-advised or
part of larger hedging strategies but the volume was there
today. The equity put/call ratio was .80, showing that call
and put activity was almost even despite the drastic selloff.
The price of protection kept up its hard-charge toward
ever-higher prices today, especially on broad-based indexes
where institutions go to hedge. "I'm a little numb, a little
nauseated," said CIBC Oppenheimer options strategist
Michael Schwartz. "We're getting close to what the pros
were looking for." Yeah, well 500 points will do that.
Schwartz and other options traders around Wall Street spent
the day watching put prices continue their rise unabated. As
the Dow began to fall sharply during the last hour of trading,
the cost of a put on the Standard & Poor's 500 index,
called the SPX, moved just as rapidly in the other direction.
At 3:13 p.m. EDT, SPX September 950 puts were trading for
20 3/4 ($2,075), a roughly 9 increase on the day. At that
point, the SPX was down 46 points to 981.20. By 3:46, the
SPX was down 20 more points and the price of that same
contract was 30 ($3,000). The prices of some hedges have
literally doubled" during the market's summer slide,
Schwartz said. "People are raising cash and it looks like
they won't be back for awhile."
Judging by traders' favorite gauge of fear, the CBOE's
volatility index, the VIX, hit rarely-reached highs. "These are
the highest volatilities we've seen this decade," said Cowen
& Co. senior options strategist Gary Semeraro. "They were
in the mid- to high 30s in August of 1990." Today, the VIX
closed at 48.33, up 18% on the day.
In addition, put buyers were still scouring the markets,
leaving market makers who were selling the options forced
to short stock to hedge themselves. "As more put buyers
come into the market, market makers have to short the
stock. It can lead to selling pressure," Semeraro said of the
situation.
Minutes after leaving the CBOE's S&P 100 index trading
pit--maybe the industry's busiest--trader Phillip Sylvester
said he saw some call buyers at the close but not enough to
quell action he described as "panic followed by more panic."
"You know how in bull markets that you never get a chance
to get in? Well, today they never gave you a chance to get
out. It's like the VIX was breathing," Sylvester said.
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