Call Buyers Return to Rally

The Dow's up, and traders are chasing it. Is it too late?
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Worries arising from the despair and selling seen Monday morning have quickly been dispelled by options traders, who haven't been shy about taking shots at the upside today.

"There is a tendency for options players to gradually go back to calls. This time, we've seen a quick return to it," says Jay Shartsis, the head of options at

R.F. Lafferty

.

Unlike Monday, today brought no disasters to

Dell

(DELL) - Get Report

, although

Intel

(INTC) - Get Report

and

Compaq

(CPQ)

had little energy to regain lost ground.

As a result, call buyers have jumped back into a fray to which they've become so accustomed. As the

Dow

climbed 76 points by midday, the dollar-weighted

Chicago Board Options Exchange

put/call ratio Shartsis follows indicated that traders were spending 24 cents on puts for every $1 they were spending on calls. On Monday, that indicator closed at 0.65, showing a much stronger inclination to buy protection. "My sell parameter on that is 0.25, so I think this rally may have another day or two," he says. Options strategists like Shartsis are often contrarian investors and believe that increasing confidence, as reflected in heavy call buying, raises a warning flag over a strong market.

Even the CBOE standard put/call ratio showed a free-flowing stream of confidence on the part of traders. On Monday, the equity put/call ratio closed at almost 0.48, a number that by lunchtime Tuesday stood at 0.41.

The CBOE's

Volatility Index

, or VIX, was behaving in a similar manner, as the market's favorite "fear indicator" was nestled below the 30 mark that traders have used to signal a higher-volatility environment.

So, you thought those March 80 calls on

Hewlett-Packard

(HWP)

were going to stay at that skinny 3/16 premium?

That was before the company announced it was going to split into two companies. As a result, the opening was delayed until just after noon, when it rallied. The March 80 calls traded more than 1,000 contracts, and the premium ran 5/16 ($31.25) to 1/2 ($50). The company's shares were up 5 1/4 to 71 1/8 today.

The March 70 calls did pretty much the same, running 2 1/16 ($206.25) to 3 1/4 ($325) on volume of more than 1,000 contracts.