Index Options Trades Showing Some Worries

Ahead of a key Federal Open Market Committee meeting, index options are ringing a warning bell.

Although the S&P 100 index, the OEX, is up 5.2 to 687.8, somebody was loading up on an insurance policy against or a bet on a market reversal after the news from the Fed. Action picked up in the October 670 puts, which traded more than 4,300 contracts by midmorning Tuesday, with the last price at 5 ($500), down 3/4 ($75). All that busy trading amounted to about half-open interest -- or established positions -- in that October strike price.

Volatility Index Today % Change 26.25 +2.14 Source: ILX

"This definitely looks like buying" in the OEX index puts, says Joe Sunderman, senior research analyst for Schaeffer Investment Research in Cincinnati. He pointed out that roughly 58% of trades are crossing at the "ask" price, indicating that most of the trades are purchases. "Somebody's looking for a reversal." (Buyers of puts generally are wagering on a decline in the index or stock price underlying the option.)

Put/Call Ratio Today (Noon) Previous Close 0.39 0.47 Source: ILX

And even though the Philadelphia Stock Exchange Bank Index, or BKX, has shimmied up 10.9 to 782.0, the Philadelphia trading floor raked in an unusually fat trade in the October 720 puts, roughly 1,000 contracts at a price of 1 15/16 ($193.75). Total open interest in all the index options totals just 9,000 contracts. (The BKX, by the way, hasn't been down around these levels since February.)

"When you have this kind of action today, it does stand out," Sunderman opined. "If you're a contrarian and think these put-buyers are wrong, then it's a healthy sign. But if it's an institution that's more informed than the average investor, then that's a concern."

Citigroup's (C Quote) year 2000 March 40 calls were up again Tuesday, to as high as 8 5/8 ($862.50) from around 7 3/8 ($737.50) at this time Monday.

The big bank's shares were up 15/16 to 45 at midday.

Other than the set-'em-up-Joe trades earlier in the day, much of the options activity was in briskly traded issues out of the usual orbit, such as Park Place Entertainment (PPE Quote), DoubleClick (DCLK Quote) and General Magic (GMGC Quote).

We've heard playing options sometimes compared to Wall Street's roulette wheel; playing options in a gambling, er, gaming stock, then, might sound slightly redundant. That hasn't stopped buyers from loading up on Park Place Entertainment October 12 1/2, November 12 1/2 and year 2000 January 12 1/2 calls. The open interest -- the contracts "opened" in an option -- total roughly 8,000 contracts, 7,000 and 6,000 in those respective strike prices. Park Place's stock price, meanwhile, is at new highs around 13 11/16.

DoubleClick, an Internet advertising company, saw its stock price rocket up 5 3/8 to 120 1/8, but a big trade clocked in the October 115 puts -- around 1,800 contracts -- might have been a shareholder looking for a little protection. Open interest totaled 669 contracts. The October 115 puts crossed at a price of 3 ($300), down 3 1/4.

And finally, though it's often less of a bargain to play options on cheap stocks, General Magic has popped up on the most-actives list a few times in the past month or so, and then on Tuesday, another few hundred contracts traded in the 2000 February 5 puts and calls. Not interesting in and of itself, except that open interest in the 2000 February 5 calls totals more than 13,000 contracts.

One Pacific Exchange options trader said the activity could be the floor "helping" a customer unwind a large position.

The stock currently trades at 1 1/2, down 3/16, despite deals highlighted earlier this year with Excite@Home (ATHM Quote) customers.

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Coda to the biggest merger in history: Hard to know who did or didn't know about the Sprint (FON Quote)-MCI WorldCom (WCOM Quote) merger.

A few weeks ago, this column highlighted an avalanche of call-buying in Sprint, although speculation at that time was that Deutsche Telekom (DT Quote) was a possible bidder.

The rumors and call-buying on Sprint had become so consistent, any real smart money plays were tossed amid a wave of speculation.