Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Ascend Communications (ASND) -- Ignore unavailable to you. Want to Upgrade?

To: djane who wrote (53366)	8/31/1998 7:18:00 PM
From: djane	Read Replies (1) \| Respond to of 61433

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. c 1998 TheStreet.com, All Rights Reserved.