Options See Wacky End to October

Spring forward ... fall back? For option market observers who've been flummoxed by the impact of a sky-high VIX on option premiums, a "fall back" in November could provide some price relief. Some option players in the market today placed bets on just such a decline.

With indices on track to finish October on a triumphantly positive note, some indications of bullishness on the S&P 500 emerged via option trades on the index contract, the SPDR Trust (SPY - commentary - Cramer's Take). Today we saw traders deploy January call spreads at the 100/110 combination for a $4.25 debit, suggesting an outlook for greater stabilization at the start of the year.

But our attentions were also drawn this afternoon to signs of a thaw to the October panic that emerged in options trading on the CBOE Volatility Index. The VIX pulled back 5% in the final market hour of this oddest October of the aughts, making a significant break below the 60-percent level to read 59.69. Most active today were the November 40 puts, which were bought heavily at about $1.15 apiece, and predicting an almost gravitational return to "pre-crazy" levels in the VIX over the next three weeks. A buyer of the VIX 40 puts today is looking for another 20 percentage points to be shaved off the composite implied volatility of the S&P 500 -- a decline of one-third -- over the next three weeks, a development that would do much to normalize option premiums on S&P components.

The value of the Financial Select Sector SPDR (XLF - commentary - Cramer's Take), a basket of leading money-center banks, rose 4.5% to $15.48 today, buoyed by gains in the financial space that followed JPMorgan's (JPM - commentary - Cramer's Take) voluntary. We wonder if there's been a wave of profit-taking by existing call holders, or whether option traders are positioning against the share price development by selling calls. November 16 strike calls have sold to the bid with the value of these positions up 20% today.

Shares in DIY-retailer Lowe's (LOW - commentary - Cramer's Take) bounded 9.3% higher to $21.94 today, but the option positioning looks anything but upbeat today. Buying in excess of open interest at the November 20 put line at 50 cents a contract suggests option traders believe today's gains will be quickly given back (and then some), while a long put spread in the January contract between strikes 15 and 20 indicates a deepening of Lowe's woes that could bring the $16.74 level (the standing 52-week Lowe's low, set back on that fateful day Oct. 10) back into play. The $1.45 debit on the January put spread establishes a breakeven of $18.55 (15% below current share price levels), while the spread pays out more than the twice the amount at risk if the trader successfully captures Lowe's decline with a downside target. Trade Alerts data classify three-quarters of today's active Lowe's activity as neutral or bearish, but with options trading at twice the normal level, it may be inferred that today's directional trading carries with it a greater level of conviction.

The value of American depositary receipts in Turkish cell phone operator Turkcell Iletisim Hizmetleri (TKC - commentary - Cramer's Take) rose 1.2% to $12.50 this afternoon after reaffirming its growth outlook for 2008, representing about a $3 premium to that stock's 52-week low. Open interest levels indicate that the tables have been stacked bearishly against Turkcell for about the past four months, with twice as many put positions outstanding as calls during this time. Today we observed what looked like either diagonal calendar put spread positioning or the rollout of an existing short put position, with a trader selling 5,000 in-the-money puts at the April 15.0 strike, and buying the same position in January.

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At the time of publication, Darst had no positions in the stocks mentioned.

Rebecca Engmann Darst is the Portfolio Manager for TheStreet.com?s Options Alerts Portfolio newsletter and an equity options analyst for RealMoney Each Thursday at 6:30 a.m. EST, she delivers the early-morning lowdown on option volume and sector trends on CNBC's "Squawk Box." Prior to her work in the equity options market, she spent seven years in Scandinavia as a Copenhagen-based chief reporter for a European Commission news service, correspondent for Spanish daily El Mundo and Radio Netherlands, followed by stints at Nordea Bank and Saxo Bank.