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Bears Move into Put Option Indices as Stocks Fall

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The bears stomped into the options market with gusto this morning, trading heavily in index puts as the broader stock market dipped more than 120 points by midday.

Trading was widespread in the

Standard & Poor's 100

(OEX) index, and investors played in almost every put strike price. The biggest attraction was the June 510 puts, with 5,356 contracts trading; also active were the June 530 and 505 puts, with 4,697 and 4,604 contracts moving, respectively. With the index at 528.18, down 3.19, bears may have been betting this two-day stock slide will continue to hurt the blue chips.


Dow Jones Industrial Average

(DJX) index, which was created last year amid much fanfare but has seen little activity since, also was busy. Traders moved 5,000 contracts of its July 82 puts -- against very little open interest -- at 7/8, or $87.50 per contract. With the index at 88.61, down 1.03, the trade may be counting on a continued fall in the Dow over the next two months.

The put/call ratio on the index swelled this morning, then calmed later, according to Michael Schwartz, options strategist at

CIBC Oppenheimer

. "It looks like investors were buying stocks on the dips and maybe buying index puts as a hedge," he said.

If the put/call ratio gets seriously out of whack because of this advanced stage of pessimism, it may actually signal a buying binge on the new lows, said Tom Burnett of

Wall Street Access

. "If sellers get out now, that could ease the selling pressure," he explained. "Of course, I'm just reading the tea leaves."

Closer to the action, an options trader in the OEX pit at the CBOE said trading was orderly, and the index had not yet experienced a "put panic."

As the rest of Wall Street tried to predict if the market downturn was just a blip and a buying opportunity or the start of a longer, deeper correction, options traders were also keeping an eye on several other indicators. The volatility index, a measure of the swing of stocks, increased rapidly to 24.77, up 2.08, today, after being around 17 on Friday. Increased volatility means that wider price swings are more possible, and trading can get frantic as the index number increases.

Another interesting indicator was the ratio of stocks hitting new highs to those hitting new lows, which was amazingly lopsided on both the

New York Stock Exchange

and the


. Investors may want to examine some of these new-low stocks for opportunities, Burnett said, but he warned that valuations remain high and might take a while to correct.

On the corporate side,

Digital Equipment


saw a big play in its in-the-money July 50 calls, with 4,530 contracts moving in early trading. The stock was at 54 3/4, down 5/16. The trade may be a positive bet, moving at 5 1/2, or $550 per contract.