At-the-money put options on the

Nasdaq 100 unit trust

(QQQ) - Get Report

were seeing a lot of action Tuesday morning as traders positioned themselves ahead of the decision on interest rates this afternoon.

Overall, volume and action were light ahead of the

Federal Open Market Committee announcement with respect to interest-rate policy, which is expected at 2:15 p.m. EST. As always, volume was heavy in options on the QQQ, as the underlying QQQ index shares were down 21 cents to $43.05.

The heaviest traded QQQ option contract was the April 43

put option, where more than 17,000 of the contracts traded on the

American Stock Exchange

. The puts rose 0.10 ($10) to 3.20 ($320). Trading was also heavy in the April 43 puts on the

Chicago Board Options Exchange

, with about 7,600 contracts changing hands.

The April 43 put contract has a large amount of open interest (the total number of options contracts that have not been exercised or allowed to expire), with 96,000 contracts. Traders could be buying the puts as protection against a selloff this afternoon after the news from the FOMC hits, or as downside speculation.

If investors are selling those puts, they could also be playing for a broad rally in the market that would allow those options to expire worthless and let them keep the premium they took in. The FOMC is expected to cut its target on the

federal funds rate by at least a half-percentage point.

Aside from trading in QQQ options, volume elsewhere in the options market was light.

"I think everyone's just going to wait until 1:15 (CST) for the most part," said Alan Goldstein of

Five Dollar Trading

, a Chicago-based market-making firm.

Still, with the put action on the QQQ so heavy, it proves traders don't see a Fed rate cut as a cure-all for what's ailing the market.

Charles Schwab


, the largest U.S.-based retail brokerage firm for options, next month will simplify options pricing in a move designed to reduce fees for most options transactions.

Schwab said payment for order flow would, in part, allow it to make the changes in the fees it charges. Schwab said the difference between the new and the current options commission prices will depend on a trader's market activity and transaction size.

Payment for order flow describes the practice by which options specialists and market makers pay brokerage and order-routing firms for their orders. The practice has prompted concerns that brokerages may route orders based on who has paid them, rather than seeking the best execution price.

Last summer, options exchanges began administrative programs to dole out payments from specialists and market makers to the brokerage firms and order-routing firms. The exchanges also instituted quality of execution reports so brokerage firms can see how effectively their orders are being executed.

A report on payment for order flow released by the

Securities and Exchange Commission

in December noted that "few firms are passing along the benefits of payment for options order flow to their customers in the form of either reduced commissions or rebates."

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