Put-Option Buying Prevails as China Incident Rattles Market

As the market continued to price in the disruption caused by a potential dispute between the U.S and China, the anxiety sparked a fresh round of put-option action and rising levels in some key fear gauges.

Volatility Index
Today	% Change
39.54	+13.78
Source: ILX

While the smell of fear was evident, the sentiment measures weren't exactly flying through the roof to historic levels. The Chicago Board Options Exchange equity/put/call ratio was 0.83 and the CBOE Nasdaq Market Volatility Index rose 3.93% to 75.06; the CBOE Volatility Index, or VIX, hopped almost 14%.

Nasdaq Volatility Index
Today	% Change
75.06	+3.93
Source: ILX

The VIX, which measures the implied volatility of certain S&P 100 options, soared to an intraday high of 39.88 today, a bit shy of the OEX's 52-week high of 41.99, set on March 22. Of course, the March 22 spike was a harbinger of a brief -- very brief -- OEX rally. Now, however, the OEX is back to about where it was on March 22.

A sharp rise in the VIX means, essentially, that traders are willing to pay more money for OEX put options, primarily to hedge their stock positions or speculate on further weakness.

Some investors interpret the VIX by the contrarian theory, meaning that low readings on the VIX are bearish, while high readings are bullish. Implied volatility is a key component of an option's price and the market's estimate of how much the underlying security can move.

Sharp VIX spikes have helped signal short-term turning points in the market in the past. Extreme readings in the index also have helped signal major bottoms in the market. The most extreme reading occurred in October 1987, when the VIX surged as high as 172.79. That level makes the high readings in October 1997 (55.48) and October 1998 (60.63) look like nothing. However, those sharp spikes in 1997 and 1998 helped indicate that the market was ready to turn around and rally after a steep decline.

The VIX, however, isn't as popular as it once was because it is based on OEX index options, a listing on which volume has waned in recent years. The VIX is, however, still watched in many corners of the trading community.

As far as trading in some individual options, there's been a fair amount of action in Siebel Systems (SEBL) April 25 calls, noted Alan Goldstein of Five Dollar Trading, a market-making firm at the CBOE. Shares of Siebel dropped $4.58, or 16%, to $24.07, off a 52-week intraday high of $119.87.

Goldstein said in that option, most of the trading was call-selling. It was unclear if the call sellers were closing out positions or opening new ones. Open interest in Siebel April 25 calls as of last night's close was more than 9,000 contracts.

Selling call options is a mildly bearish strategy. Investors sell calls on the hope that the options will expire worthless, or below the strike price. April equity options expire on April 20.

The prices for Siebel options, which have been high lately, remained high, despite the selling of the options. Because the implied volatility in Siebel is so high, it's attractive for customers to sell, Goldstein noted.

As of late morning, the Siebel April 25 calls saw volume of about 3,500 contracts on the CBOE. Large blocks of the April 25 calls traded at between 3 ($300) to 3.40 ($340). The calls last traded yesterday at 5.30 ($530) on the CBOE.

Meanwhile, put buyers were out en masse in energy stocks yesterday, according to the Skupp-Seidman options duo at Miller Tabak. In a note to clients today, the team highlighted, in part, put buying in the Philadelphia Stock Exchange Oil Service Index, or OSX. The OSX today fell 2.3% to 106.10.

Overall, nearly 23,000 puts traded on the OSX yesterday, while only about 2,550 calls changed hands. In the OSX, almost 20,000 of the May 120 puts traded, with the last trade at 13.80 ($1,380). Open interest in the options was 9,900 as of Friday's close. Many of those positions were probably intraday trades, because open interest in that option was only 10,025 as of last night's close.

There was no trading so far in the May 120 puts today. The in-the-money May 110 puts were seeing a little bit of trading, on volume of 300 contracts. The puts rose 2 ($200) to 8 ($800).

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Bear Stearns (BSC), partial owner of floor trading firm Bear Hunter Specialists, made it official today that it is buying GHM, an American Stock Exchange specialist firm. Terms weren't disclosed.

TheStreet.com first reported that Bear Hunter was close to buying GHM in late February. TSC subsequently reported that the impending sale of GHM to Bear Hunter was sparked by the Amex's intentions to impose heavy sanctions on GHM principal Joseph Giamanco, which it eventually did. On March 16, an Amex disciplinary panel said it had permanently barred Giamanco, president of GHM.

Bear Hunter, which already has a big presence as an Amex options specialist, will be the largest options specialist on the Amex after the acquisition, Bear Stearns said. After the takeover is complete, the firm said, it will be responsible for trading about 22% of the Amex's total reported options volume.

GHM is the specialist for 76 options and 65 equities at the Amex. Bear Stearns, in the announcement, said that Bear Hunter Specialists will manage the option specialist rights and that it has entered into a joint-account agreement with Aegis Specialist to manage the 65 equity specialist rights.

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