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Expiration Is Not Playing a Big Role in the Big Rally

Traders were right to get long last night.

Traders who had shorted options during the Brazilian devaluation tumult were scrambling to cover as the market was treated to an expiration-day rally.

Yesterday's closing price of straddle positions that would benefit from a sharp move in the market reflected the belief that an 18 to 20 point move in the

S&P 500

was possible. Around 2:30 p.m. EST, the S&P 500 was up 22. "Maybe there were too many guys short in the past few days," says Jay Shartsis, the head of options at

R.F. Lafferty


The rally, however, didn't seem to be precipitated by expiration-related action, according to some. "This morning, we didn't show any imbalances," says Michael Schwartz, the senior options strategist for

CIBC Oppenheimer

. "The high open interest that we saw was in traditional stocks and was probably offset by other positions. There was a lack of open interest in the Internet names." Schwartz says the slight open interest in Net stocks illustrated that investors were day trading options positions the same way they were day trading the underlying shares. "They didn't go home long."

In the expiration benchmark

S&P 100

options, the trading was leaning toward the bullish side, with the January 610 and 615 calls trading huge volume. The 610 calls traded more than 23,000 contracts and the out-of-the-money 615s generated traffic of more than 12,000 contracts.

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The price of the 610 calls closed at a slim 7/8 ($87.50) Thursday but by midday Friday, it had spiked to a juicy 1 7/8 ($187.50) as the market showed no sign of slowing.

Yet volume in out-of-the-money puts was outpacing some of the calls. The out-of-the-money January 600 puts traded 13,000 and the January 605 strike's volume hit 18,000, showing at least some interest, perhaps in writing the options for the 1/8 ($12.50) and 1/4 ($25) premium against the chance of an afternoon slide.

Few floor traders wanted to be short options, especially calls, going into today's market because of the looming possibility of a big move, traders said today.

Traders who had jumped into speculative call options in

Fruit of the Loom




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on the hopes each would be taken over may leave the decks somewhat disappointed.

Speculation in each had intensified during the past week as January call buyers swarmed in, but neither had announced a deal by midafternoon today. The calls, which had gotten expensive at the height of the speculation, were set to expire worthless.

In the case of Fruit of the Loom, the January 17 1/2 calls that cost 2 ($200) late last week were trading for 1/16 ($6.25) today with open interest at more than 2,300 contracts. The stock was down 1/8 to 16 15/16.

Manugistics was trading down 1 1/4 to 15 3/8, a far cry from what the masses who rushed that company's calls on Wednesday were expecting. The January 12 1/2 and 15 calls were the only January series with open interest of more than 1,000 contracts.