Options Volatility Rises as Stocks Fall

Erin Arvedlund

The Dow was down more than 160 points at midday, but there were few bottom-fishers trolling for cheap rebound plays.

Volatility Index Today % Change 26.29 +10.74 Source: ILX

The dramatic rise in volatility today may be coming from some deja vu seasonal panic of September-October months, plus an unsettling calm in the past few weeks, leading traders to believe that implied volatility in the market was far too low.

Put/Call Ratio Today (Noon) Previous Close 0.57 0.89 Source: ILX

"We've been expecting a rise in the volatility for a while now," said Paul Lieberman, a derivatives analyst with Lehman Brothers in New York City. "Given the market's expectation for more rate hikes, the fact is that the market gets concerned about what's going to happen the next time around."

The Chicago Board Options Exchange's volatility index, known as the VIX, jumped nearly 15% during trading early Thursday. "That's a big jump, but it puts the VIX closer to what we think is an appropriate level given what the market's been doing."

Driving that jump was volume in S&P 100, or OEX, index puts, with the out-of-the-money September 680 puts up 3 ($300) to 8 1/2 ($850) on volume of more than 4,000 contracts. The OEX was down 8.97 to 689.24.

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Ending months of speculation, Rambus (RMBS Quote) finally got stiff-armed by Intel (INTC Quote). Rambus subsequently got the dump from investors, who pounded the stock down 7 13/16 to 87 3/8.

Rambus options activity turned up last week, and at that time, the September 105 calls were at 7 ($700) and the September 105 puts at 6 3/4 ($675).

Today, the 105 calls were trading at 1 7/16 ($143.75) and the 105 puts at 20 1/8 ($2,012.50). Not bad for one week's blood, sweat and tears.

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A rare order for Harley Davidson (HDI Quote) November 45 puts drew eyes to trading in the motorcycle manufacturer's options.

The November puts were up 3/16 ($18.75) to 1 1/8 ($112.50) on volume of 435 contracts against open interest of just 32 contracts.

With the stock down 2 13/16 to 51 3/4 on no news, the October 55 puts were also sharply higher, up 1 1/8 ($112.50) to 3 7/8 ($387.50) on decent volume.

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The Chicago Board Options Exchange delivered another massive trade Thursday, this one in options for Telmex (TMX Quote), the Mexican telephone company.

Salomon Smith Barney again made waves on the CBOE with a 21,000-contract order for long-dated options in Telmex, the 2001 January 100 calls. Meanwhile, a separate tranche of 9,000 contracts in the same options crossed on the American Stock Exchange.

LETCO, the designated primary market maker for Telmex, said the floor hadn't crossed an order of that size since the early 1990s, when Telmex stock was moving wildly against a backdrop of violence in Chiapas and the explosion of emerging markets. "We do a majority of the Telmex options business, but we haven't seen anything like this in a long time," said one LETCO trader in Chicago. "This same customer had been buying 2001 January 85, 90 and 95 calls and selling the stock" short before its recent move downward.

The LETCO market maker added that the customer's order for the calls was part of a "buy-write" strategy, whereby Salomon Smith Barney bought the stock and "wrote" or sold call options against the block of stock.

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