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Expiration Adds Some Juice to Volatile Market

Uncertainty has kept traders married to their January positions.

Big swings in the market this week have set the stage for an options expiration which has traders girding for action that holds the promise of being far more volatile and exciting than usual.

Rising volatility accelerated by mounting problems in Brazil and a weaker-than-expected earnings climate have kept traders on their toes the past three sessions, but have also kept enough uncertainty in the market to keep many players active in January positions. "There's a tremendous amount of open interest left in January options because of the volatility," said one

Chicago Board Options Exchange

market-maker. "People want a couple of more days to root for their stuff."

Today's expiration includes equity and index options.

Those rooting interests aren't limited to just the index options that speculators usually target on expiration. Typically, they begin rolling out of expiring options into the next month's positions by selling, in this case, the January contracts and buying February ones.

A rising

CBOE Market Volatility Index

(VIX), however, has brought higher prices across the spectrum of options, and, with tech and Internet stocks posting bigger moves, an out-of-the-money option isn't worthless until the closing bell.

"The volatility is extremely high going into expiration. There was a lot of action Wednesday in the downside puts and upside calls, with buyers of both," said longtime index options trader Mitch Kasper of

Hull Associates

. The VIX, reflective of the pricing of

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S&P 100

(OEX) options, ran to 34.74 from 31.91 on Thursday, a move that showed increasing uncertainty among big players.

"The at-the-money straddle is trading for about 9 or 10. That translates into an 18- to 20-point move in the

S&P 500

with one day remaining," Kasper said. "It seems like a pretty good sale unless there are some dramatic events, and we've had plenty of those."

The S&P 100 index closed at 601.2, and open interest was deep all around. The January 590 puts had open interest of 9,622, and the January 610 calls still showed 13,175 contracts in play. The same trend held true in the names, or individual equities. Think



doesn't have a chance to finish at 370 today? Well, that call, about 30 bucks out of the money, would have cost you 1 3/4 ($175) at the close Thursday.

"The last several expirations have been to the upside, which has made people sensitive. Market-makers and professional traders don't want to get caught short calls one or two strikes out of the money. Expect to see a lot of activity in those calls

on the OEX," Kasper said. "But if something happens in Brazil, that could shift to the downside puts."

Being a seller of those out-of-the-money calls would force traders to either buy the options back at inflated prices late in the day or to take a loss on the cash-settled index options after the close.