Fear Unloading in Chicago as Options Show More Bullish Signals

If it feels like the jitters that have hung over the markets for months are dissipating, you would be right.

Volatility Index
Today	% Change
29.23	+2.7%
Source: ILX

The proof is in the pudding, which in this case would be the Chicago Board Options Exchange volatility index. The index, also known as the VIX, is a key barometer of fear. The VIX rises when put -option buying on the S&P 100, or OEX, increases. Investors buy put options to either protect long positions or to speculate on further downside in the underlying security. It's also closely watched as an indicator of where the broader markets are heading. And, after the fear gauge reached its highest level in more than two years last month, things have been looking up.

Nasdaq Volatility Index
Today	% Change
74.75	+4.07
Source: ILX

On March 14, the markets were in retreat mode, and speculation was running high that Lucent (LU Quote) -- facing a liquidity crunch -- might be forced to file for bankruptcy protection. At that point, the VIX was at 34.6 -- its highest level since October 1998.

Since then, the VIX has been easing steadily, signaling that investor confidence was on the rise and money was being put back to work in equities. Today, the VIX was at 29.2, marking a 16% drop since mid-March.

According to Paul Foster of 1010WallStreet.com, volatility reached its boiling point in March and now we're seeing it settle down to a simmer. Essentially, investors have become more relaxed and are comfortable making more aggressive plays in the options market. However, Foster warns that volatility will not come down to the 18 to 25 range -- historically, a safety zone regarding volatility -- so investors should not get caught up in the madness of crowds and make rash decisions on stocks.

Meanwhile, in today's action, call -buying was once again the weapon of choice for bullish investors, as a deluge of orders came in on the major exchanges. There was some robust volume on the Microsoft(MSFT Quote) April 60 and 70 calls, indicating that investors have faith that the software giant will firm up and reclaim a bit of its former glory. The April 60 calls traded more than 15,000 contracts at a premium of $9.70, compared with an open interest of 83,220.

The May 70 calls were also getting a lot of action with 12,300 contracts at a premium of $3.00, as compared with an open interest of 52,063. On the other side of the coin, put activity was intense on the April 70 options as nearly 4,000 contracts were purchased on an open interest of 5,966. Microsoft is witnessing speculation on both sides, but the call volume is clearly higher, indicating the bulls outweigh the bears among options investors.

Shares of Microsoft closed up 1.41% to $69 today.

Investors were also chasing the The Nasdaq 100 Unit Trust(QQQ Quote), with the April 48, 49 and 50 calls trading a combined 65,000 contracts. Heading into expiration, many investors seem confident they can capitalize on the recent cooling of volatility measures. The QQQ closed regular trading at $48.40.