Fearless Bulls Scaring Some Options Players

The volatility index is dropping, raising concerns about a herd mentality.
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The bulls are feeling no fear this November options-expiration day. Witness the action in blue-chips such as IBM (IBM) - Get Report.

The stock market's fear barometer, the

Chicago Board Options Exchange

volatility index, has hit lows not seen since roughly mid-July. When the fear starts to evaporate in the market, the VIX, which measures the expected volatility of underlying index options, usually drops. The VIX hasn't seen the teens in about five months, and that means people just aren't worried.

At midday, the VIX was off 0.12 at 19.98.

"Below 20 gives off a sell signal," said Scott Fullman of

Swiss American Securities

. "It's a short-term signal: Be defensive for the next several days."

Once the volatility measure drops below 20, "There's too much complacency and we should have a pullback," Fullman explained. And if it goes to 15, that's even more of a reason to get out: "There's no risk premium built into options at that point."

When the trading majority isn't worried, according to against-the-herd options trader philosophy, it's time to be scared. The calm bullishness was even more eerie given that Friday is a "double-witching" expiration, covering both index and individual stock options.

Take IBM, where a "huge seller of calls is selling and the trading crowd is buying" on the CBOE, said Paul Foster with


in Chicago. "When there are sellers of calls, that means there's a huge appetite for the stock" to hedge against those option bets. IBM's stock was up 5 3/8 to 103 3/8, and the November 100 calls jumped 3 ($300) to 3 3/8 ($337.50). And the optimism is extending out to December, with IBM's 100 calls up 3 1/4 ($325) to 6 5/8 ($662.50).

Equally impressive was the volume in IBM's November 100 calls, totaling 12,600 contracts, compared with the 22,000-contract open interest (the number of contracts opened in that strike price; at the end of the trading day, November options expire worthless).

Same thing with


(XRX) - Get Report

, whose shares rose 1 3/16 to 28 15/16. The December 30 calls rose 1/2 ($50) to 1 7/16 ($143.75).

Foster said he's looking for bullish plays in unlikely places. For instance,

Philip Morris

(MO) - Get Report

, a beleaguered stock and one he's long.

Sanford Bernstein

Friday morning suggested the industry's problems may be much closer to being cleared up by the middle of 2000.

"I'd be a buyer of longer-term options on Philip Morris, say January 2001," Foster explained. "Either that or I'd sell some puts off of a base in the stock price."

In other words, if you believe the stock price can't fall further after a certain point, buying calls or selling puts would be one strategy. LEAPS, or long-term equity anticipation securities, are one way to play that idea.

A 2001 January 30 call, for instance, currently fetches 3 1/2 ($350); the stock is down 3/16 to 25 3/4.