Witching Looms, but Options Traders See a Bounceback Ahead

It's not often you hear this, but here goes: If you don't know what you're doing, don't buy options today.

This Friday is "double-witch" expiration -- meaning that both stock options and index options are set to expire simultaneously. The final witching hour of trading on any Friday expiration can get hairy, as program traders and big institutional investors adjust their portfolios with massive chunks of capital in the underlying stocks.

Volatility Index Today % Change 30.14 +10.24 Source: ILX

And a hairy beast emerged this morning with a Greenspan-inspired scare that brought the Dow Jones Industrial Average close to cracking the 10,000 mark on the way down.

From some angles, this October's Friday expiration is looking even spookier: October expiration in 1987 fell on the weekend that launched a thousand screams in the stock market. The following trading day was Black Monday, when the Dow lost some 22% of its value.

But, hey, forget the superstitions. "Expiration plays into today's correction minimally," said Michael Schwartz, options strategist with CIBC Oppenheimer in New York. "The real double-witch is PPI and Greenspan. And the curse of the Bambino." OK, well, you see what we mean about superstitions.

Put/Call Ratio Today (Noon) Previous Close 0.74 0.54 Source: ILX

Nearly all the options pros phoned this morning said the stock market is due to come back this afternoon, even with the heavy action in expiration. For them, it's a buying opportunity. "According to all our proprietary signals, the market's coming back today," said Rob Sorrentino with Sorrentino Asset Management, which trades almost exclusively in index options. "Greenspan just can't manipulate the market like he used to."

If you're an individual investor, it's just too weird out there to trade at all. There was a lot of program selling generated by the S&P 100, or OEX, index hitting the 675 technical level, Schwartz said. (This column earlier in the week warned about possible program selling.)

Scared? Schwartz points out that "options today -- this particular day -- are going to be expensive because of all the volatility, so if a hedge is what you're looking for, and you have to start buying today, start slowly." Maybe with the Nasdaq 100, or QQQ, index options, or the underlying index's unit trusts.

And, hey, on days like today, options are just really pricey amid these particularly scary market movements. With the OEX down 14.1 to 657.9, the at-the-money October 655 puts shot up 1 7/16 ($143.75) to 2 ($200 per contract).

So, "if you want some protection or you want to play for a bounce, use limit orders, not market orders," Schwartz warned.

Among the most heavily traded options Friday were the bank stock options, and the Philadelphia Stock Exchange Bank Index, or BKX, slid 19.65 to 722.10. An eerie correction, given a big fat trade in October 720 puts earlier in the month.

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Also, join us for an hourlong chat on options Tuesday, Oct. 19, at 5 p.m. EDT on Yahoo! when trader Lewis Borsellino will discuss daytrading options. Register at chat.yahoo.com. It's free!