Options Signs Make Bottom-Fishers Wary

Although stocks have enjoyed a nice bounce off Monday's lows, some market pros aren't expressing a lot of confidence that the market has bottomed out just yet.

Volatility Index
Close Today	% Change
28.38	-1.36
Source: ILX

The problem? From a sentiment standpoint, says hedge fund manager Jordan Kahn, "We haven't seen the extreme fear we've seen in past bottoms." Generally, huge amounts of fear, shown by high equity put/call ratio readings, and spikes in the CBOE Volatility Index, or VIX, for example, are signs contrarians watch for to help signal to them that the market has bottomed. Lately, neither the equity put/call ratio nor the VIX has reached levels seen in October, for example.

Put/Call Ratio
Close Today	Previous Close
0.76	0.70
Source: ILX

A few things going on in the market right now make Kahn, who runs Kahn Asset Management, wary of bottom-fishing. Some key support levels on the Nasdaq Composite Index and on the Nasdaq 100 have been broken, he pointed out, and those often are retested before regaining strength.

Kahn said he's got hedges on nearly all of his core positions. One of those hedges is in the form of puts on the Nasdaq 100 unit trust (QQQ Quote), or QQQ. He owns the January 75 puts, which were up 1/2 ($50) to 6 1/4 ($625) Thursday morning on volume of 1,265 contracts.

As for November equity and some index expiration tomorrow, some market pros think there's an "e-word" that brings carries a little more weight these days. "The whole thing with the election has taken the steam out of expiration," said Alan Goldstein of Five Dollar Trading in Chicago.

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The Securities and Exchange Commission unanimously approved a rule Wednesday it said will help ensure that customer orders for options traded on exchanges receive best execution.

The SEC, in a fact sheet, said that because of multiple listing, along with a lack of effective access across the options exchanges, the chances of an intermarket trade-through -- an order being executed at a worse price than is available on another exchange -- are "significantly increased." Intermarket trade-throughs are estimated to happen in as many as 5% of all options trades, the SEC said.

In October 1999, the SEC ordered the exchanges to develop a linkage plan. In July, the SEC approved a linkage plan put forth by the Chicago Board Options Exchange, American Stock Exchange and the International Securities Exchange. An alternative linkage plan proposed by the Philadelphia Stock Exchange and the Pacific Exchange was rejected by the commission. The PHLX and P-Coast have subsequently joined the Amex-CBOE-ISE linkage plan.

The rule that was adopted was a trade-through disclosure rule, which would require a broker to disclose to a customer when his order was executed at a price inferior to the best-published quote. A broker-dealer, however, would not have to make the disclosure if the trade took place on an options market that participates in the linkage plan. The commission said that the plan approved by the SEC in July "would need to be slightly modified for participants' members to be exempted from the disclosure requirements of the rule."

The rule does not prohibit trade-throughs.

The SEC also approved amendments to the quote rule, requiring options markets' quotes to be firm up to their published quotation size for customer orders. The rule is designed to make sure that quotes will be honored when orders are routed to them from other exchanges.