Put Plays Abound in the Nasdaq

Finally, the fear has come back to the options market.

With the put/call ratio edging up and put buying running amok in the Nasdaq 100 (QQQ Quote) unit trusts it seems investors who may have taken it on the chin with Tuesday's tech selloff are looking for prevention today.

Volatility Index Today % Change 26.08 -1.32 Source: ILX

The Nasdaq 100 unit trusts, known as the Q, saw massive put action as option traders have come to use the tracking stock as a hedge against their high-tech holdings. The Q was down today to 209 1/2, off 5 1/4, as the Nasdaq continued to fall in morning trading.

Put/Call Ratio Today (Noon) Previous Close 0.40 0.34 Source: ILX

Trading was heaviest in the Q's April 210 and 220 puts, moving 6800 and 6600 contracts, respectively. The more speculative April 206 puts traded more than 5000 contracts at 11 ($1100), meaning the Q would have to fall to 195 -- a 7% dip from current levels -- by mid-April to be profitable.

However, some investors were thinking the Q wasn't going away that quickly. In a somewhat bullish put spread play, an investor sold 6250 contracts of the June 190s at 12 ($1200) and bought 2000 contracts in the June 176 puts at 8 3/8 ($837.50).

That strategy would mean the investor took in premium to possibly go long the index at 190 if it should continue to fall (a put seller is obliged to buy the underlying equity if a put buyer exercises his option to sell the shares), then gave himself an exit point in the June 176s as a hedge against the index really hitting the bottom.

Michael Schwartz, chief options strategist at CIBC World Markets, cautions against interpreting the numbers in too bearish a way. "What you're seeing is hedging by buying index puts and Q puts," Schwartz says, adding that these hedges are likely against massive holdings in many of the big technology stocks. "It's still all tech."

Professional traders prefer seeing hedging-related activity because it serves to keep panic selling from happening instead.

Other than the put action, big rollover plays ahead of Friday's expiration were still the rule. Citigroup (C Quote) and Phillip Morris (MO Quote) were two blue-chips seeing a lot of that action today.

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Option investors were not certain about how to play the rumors about a possible deal between Yahoo! (YHOO Quote) and eBay (EBAY Quote).

While they stayed away from playing in the options of the online auction house giant, there was some selected selling in Yahoo!'s in-the-money calls.

More than 2000 contracts in Yahoo's April 140 calls moved at around 30 1/2 ($3050) after falling about 30% from their last trade. The strategy appears to be call selling, in which the trader takes in some premium (more than $6 million in this case) and bets Yahoo! will continue to fall. Yahoo! was down to 159 5/8, tumbling 9 1/8.

If Yahoo! falls below 140 by next month, the calls will expire worthless and that $6 million the call seller took in today will be gravy. With America Online (AOL Quote) losing one-third of its value in the weeks following the announcement of its mega-merger, perhaps the call seller is hoping for a repeat performance in Yahoo!.