S&P Index Players Buy Calls on Rally

With the Alternate Universe divergence in the major markets continuing (Dow soaring, Nasdaq tanking), option traders spent much of Thursday -- the last day before the feared triple-witching -- finishing what work they had started during the first part of the week.

Volatility Index Today % Change 23.67 -5.55 Source: ILX

Heavy rollover plays continued as expected because March has become such a mammoth month for call buying. Procrastinators who waited until today to roll were turning over the March options into April in such big names as Xerox (XRX Quote) and General Electric (GE Quote).

Friday is the simultaneous expiration of index options, equity options, and index futures, a quarterly occurance known as triple-witching for its rare capacity to roil the markets.

Put/Call Ratio Today (Noon) Previous Close 0.35 0.45 Source: ILX

"It's funny, the stocks that were hot are not, and the stocks that weren't hot now are," said Scott Fullman, options strategist for Swiss American Securities. "I think you'll see people using expiration to do some re-evaluating of their portfolios."

To that degree, there was some limited staking of claims on the future as the Standard & Poor's 500 index saw some hectic action all the way out until June. With the index up 16.7 to 1408.9 at midday, the June 1400 and 1500 calls traded more than 3,000 contracts each.

With the 1400 calls trading for 73 1/4 ($7,325), buyers of this strike are speculating a 5% climb in the S&P 500 by mid-June. Also active were the June 1400 puts, trading 5,850 contracts, and the June 1425 calls, trading 1,125 contracts.

Among the company options, there also was some playing out of sentiment among the rollovers. Dell (DELL Quote), for example, saw a massive roll of its March 40 calls -- not into the April 40s as usual -- but into the August 50s with more than 11,000 contracts moving at 9 1/4 ($925). Dell's stock has climbed 35% in the past month. It was at 51 7/8, down 1 13/16, today.

The structure of the August strategy indicated the rollover player might have been selling calls against a large holding in Dell and taking in some cash, in this case more than $10 million.

"I'm seeing people get more defensive in the technology stocks," Fullman said. "They're playing a little more in the put side and setting up hedge strategies to protect themselves."