As Fear Recedes, Call-Buyers Swing Into Action

With the rough seas that opened the markets Monday morning calming a bit, options traders plunged into the week of options expiration with a flood of bullish call-buying on their old tech favorites.

Volatility Index Today % Change 26.82 +12.69 Source: ILX

The Chicago Board Options Exchange volatility index opened almost 15% higher as the Dow and Nasdaq began trading awash in red. As the terror subsided, the volatility index returned to a less cardiac-inducing level.

Put/Call Ratio Today (Noon) Previous Close 0.33 0.31 Source: ILX

Despite the drop, the put/call ratio stayed steady, demonstrating that it will take more than a morning blowoff to make investors go negative. "I've never seen anything like it," said Jay Shartsis, options strategist for R.F. Lafferty. "They are not buying puts; they never buy puts."

This lack of fear is a big bearish indicator, Shartsis explained, and it means that investors are not properly hedging themselves against a market slide.

Instead, options investors spent much of the mixed day rolling over their March options, which expire Friday. With all the call-buying of the past few months, investors had a lot of work to do. America Online's (AOL Quote) March 60 calls alone had almost 65,000 contracts in open interest, much of which will get moved into April positions.

Ever bullish, investors were rolling over into higher strike calls for April, especially in the tech favorites. Compaq (CPQ Quote), which was up 11/16 to 29 1/4 at midday, saw investors grab for its April 30 calls. And Intel (INTC Quote) and Dell (DELL Quote), which both hit new intraday highs today, watched as investors made a beeline for the out-of-the-money calls about 5 points above the new highs.

Intel's April 130s were active after it hit the 125 benchmark, and Dell's April 60s flew out the door after it established a new high at 54 5/8.

Though out-of-the-money call-buying isn't rare, this was set-jawed optimism in the face of an uncertain market.

"If the Nasdaq firms up, these companies will fly," said Joe Sunderman, senior research analyst at Schaeffer's Investment Research. "Investors are using their rollover money to speculate on the upside."

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Of course, some Old Economy stocks were getting a little negative attention. International Paper (IP Quote) saw a massive put trade go through in its October 40 puts, trading 3,000 contracts against open interest of just 28.

The trade went out at 7 3/8 ($737.50), meaning the put-buyer would need IP to sink to 32 5/8 before mid-October to be profitable. International Paper was trading at 35 7/16, down 11/16, today.