Expiration Looks to Be Light, but Volatility Still Vexes

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With the

Dow

finishing the day down slightly, the almost 300-point gallop of the past two days has slowed to a trot just in time for this Friday's expiration day in the options market.

Options strategists are using the time for some old-fashioned "cipherin," trying to read the mixed signals the market is sending.

Despite the apparent fizzling of this week's rally (and the options market adage that Wednesday's activity is usually the template for Friday's), several option strategists believe the market is heading higher through the week and even into next week.

"I think we are seeing an upward trend in the market through this expiration week," said Jerry Hagerty, head of

Cape Market Research

. However, the August expiration tends to be a quiet one, and it is unlikely to hold a lot of fireworks, Hagerty said. "Expect to continue to see light volume and summer doldrums."

It appears that market makers are long the option market and short futures, indicating they will have to hedge to the buy side come Friday, pushing stocks higher, said Leon Gross, options strategist at

Salomon Smith Barney

. "We are seeing a small bias to the buy side," Gross said.

All is not so clearly presaged, however, after looking at other indicators. For example, chief among the concerns of several strategists is the

volatility index

(VIX), which continued to edge slowly down but has not made any sudden moves. The VIX closed at 27.71, down 1.08, after ending at 31.08 Monday. As pointed out

yesterday, the steadfast VIX -- often taken as a measurement of investor uncertainty or fear -- has not come down with the Dow's surge of this week as many investors expected. That may indicate this recent rally is akin to the Great Powder River -- one mile wide and one inch deep.

Another indication of that is the put/call ratio, according to Joe Sunderman, senior research analyst at

Schaeffer's Investment Research

. The put/call ratio on all the open interest on the

Standard & Poor's 500

index (OEX) has been moving up over the past few days as more puts were being purchased, he said. The ratio stands at 1.31 today, indicating there are 1.31 puts in open interest for every one call. "We view the increased put buying as a good thing," Sunderman said, hinting that it tends to flatten out the market's exuberance.

But perhaps the best summation of the option market's recent ill ease was offered by Dennis Bein, portfolio manager for

TSA Analytics

. "There is not a lot of depth, but there is enough speculation to drive the market," Bein said.

Put buyers looked to be backing off their attack on

American Home Products

(AHP)

after

Merrill Lynch

upped the company to near-term buy from attractive and bestowed on the stock the mantle of Focus One stock of the week. American Home's stock responded with a climb to 51 15/16, up 13/16, today.

Yesterday, American Home's shares dropped on word that a negative article on the company's drug Premarin was coming out in this week's edition of the

Journal of the American Medical Association

.

It was uncertain if yesterday's put buyers moved to the call side for cover today, but overall call activity was relatively strong in several September strike prices, ranging from 45 to 60. The in-the-money August 50 calls saw some trading, and investors even were staking bets in October strikes.

Oddly, the heaviest traded in the stock's options today was in its 1999 January 50 Leaps, which moved 1,547 contracts against only 911 in open interest.