Fear Rears Its Head Once Again in Options Trading Ahead of Earnings

After a steady decline over the past month or so, volatility in the options market has crept up again Monday.

The Chicago Board Options Exchange volatility index, or VIX, continues its upward tick today after a healthy rise on Friday. A substantial upward movement in the VIX typically means that investor sentiment is weakening. As a result, investors' option plays become less aggressive. At midday, the VIX stood at 31.9, up 10.1% from Friday's close.

Volatility Index
Today	% Change
31.9	+10.1%
Source: ILX

According to Ross Kominsky of BraveSky Trading, it is not surprising that stocks are down today. It is his contention that when volatility jumps in a strong market, as we had Friday, it tends to signal the end of a rally and a subsequent downward trend. He goes on to say that "at this point in time, we're seeing very little commitment to positions." Essentially, volume on the major exchanges is lower today as investors are showing signs of waning confidence, perhaps taking a step back from their previously bullish sentiment.

Nasdaq Volatility Index
Today	% Change
77.83	+4.8%
Source: ILX

Part of the reason we're seeing a downward move in today's market is the research note put out by Merrill Lynch this morning, downgrading four big-name chipmakers: Intel(INTC), PMC-Sierra(PMCS), Applied Micro Devices(AMCC) and Vitesse(VTSS). Semiconductor analyst Joseph Osha wrote, "The recent sharp uptick in semiconductor stock price performance has investors asking whether we're close enough to the bottom to merit buying stocks. ... We think not." He then discussed the near-term future of the chip sector, saying, "We expect the semiconductor business to bottom over the summer, and we believe we are close enough to that bottom to merit staying with our accumulate rating." The Philadelphia Stock Exchange Semiconductor Index, or SOX, was down 5.6% to 631.9 in recent trading.

Despite the downgrade, Intel was getting some love from options investors today as the out-of-the-money May 32 1/2 calls traded roughly 2,400 contracts on an open interest of 20, 654. Currently, premiums on the May 32 1/2 can be found as low as $1.10.

Shares of Intel traded down $2.57, or 7.9%, to $29.86.

Elsewhere, several big-name companies were set to post earnings this week, and that was causing some interest in the options market. One of the names on the tip of everyone's tongue is online retailer Amazon.com(AMZN), which posts earnings Tuesday. Investors were chasing the May 20 calls, which traded roughly 8,000 contracts compared with an open interest of 6,059. The May 15 puts were also active, which means speculation exists on both sides. The company's shares were recently trading up 37 cents to $16.15.

The lighter volume in options trading can be attributed to a case of cold feet on the part of bullish investors, or it could simply be that they're cautiously monitoring earnings announcements that are due out this week.

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