As Options Prices Stay High, Bottom Fishers Take a Peek

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As the

Dow

tries to shake off a slump worthy of derailed slugger

Mark McGwire

, options traders are engaged in a pitchers' duel of buying and selling around others' directional bets. And it's definitely throwing some curveballs into the market.

"People are selling on rallies and buying on dips," said

Strome Susskind

options trader Kyle Rosen, after surveying a morning that saw both. "We're seeing a little bit of buying. People are nibbling at some tech stocks. But in the meantime, the two forces are going to battle each other."

That battle has options prices higher than the market has seen this year, and that factor could be adding to today's gyrations. Rosen said it had an effect on Tuesday, when put prices got so high that shareholders apparently decided it would be better to dump shares than pay high prices for the insurance. "Yesterday people were flooding into puts and when market makers saw everybody coming, they jacked up their prices," Rosen said. "What happened is that when investors couldn't protect themselves, they decided to sell stock." Today, call prices are up and that could lead to some outright long stock buys or at least heavy buy-writing activity (investors buying stock but selling out-of-the-money calls).

Today, the

volatility index

(VIX) receded 3.84 to 29.26 but was still well above the historically low levels it was at just a few weeks ago. And while there was buying in some select names -- old favorites such as

Intel

(INTC) - Get Report

and

Coke

(KO) - Get Report

-- the real struggle was evident in the

Standard & Poor's 100

index option traffic at the

Chicago Board Options Exchange

. From his vantage point on the options desk at

Wall St. Access

, trader Keith Keenan said he saw prices swirl early in the day. "When the market was down at the open, the August 530 calls were trading for about 9," he said. "When the futures started to come back, the calls went up to around 12 in a matter of minutes." Meantime, the price of an August 530 put had fallen 5 1/4 to 10 5/8 by 11:30 a.m. EDT.

With those kinds of swings in store today, Keenan said he saw premiums rising on both OEX puts and calls, indicating that the trading crowd wasn't going to take much risk this morning, at least not without getting paid enough to make it worthwhile. "They're not taking any risk on the floor right now," he said.

Today, those prices remained high, and with the volatility still present, even call buyers weren't going to find too many bargains. Still, the put-buying gratified some contrarian traders. "We're seeing some very heavy put buying this morning. We could get a sharp rally here," said Jay Shartsis, head options trader at

R.F. Lafferty

in New York. Shartsis is a believer that the overall market needs as much skepticism as possible to rally.

Retail investors seemed to be returning to their tech favorites. Intel staged a rally, up almost 2 to 83 5/16, and options traders were more than happy to get on the bandwagon. The chip maker's August 85 calls traded 2,000 contracts by 11 a.m. and even the August 90 calls volume climbed to over 1,000, although some of that could well have been buy-writing by investors long the company's shares.

Coke shares, which were battered yesterday, had some fizz (sorry, couldn't resist) today as they picked up 1 7/16 to 80 1/16. The calls buyers staked their claims there as well, and sent volume on the August 80 calls to 1,200.

Wall St. Access trader Keenan said he'd also seen interest in

Lucent

(LU)

and

Dell

(DELL) - Get Report

.

Still, true believers are few. "People should be selling puts on declines, calls on a rally, but at about 15% out of the money," Rosen said. "Because 200 points on either side is a coin toss right now."