Three months ago, few investors could have imagined that the Internet sector would be a safe haven.
Yet, on a day when the
spent the late morning down more than 100 points, options traders were actually finding some values in the calls of Net stocks that previously were deemed untouchable.
Truth be told, they have few alternatives. Even the professionals are not eager to pick a direction and speculate via index options. So they are left, according to money manager David Schultz of
Summit Capital Holdings
, to "work the volatility. The last thing they are doing is picking a direction."
As a result of the market's weakness the past three days, the
Chicago Board Options Exchange
volatility index was up more than 10% at one point this morning. By midday, it was at 31.23, ahead almost 9% of yesterday's levels. The VIX is frequently used as a fear indicator by professional traders and contributes, when it is rising, to higher options prices.
Schultz says he's seeing nibbling around the Net stocks, primarily
, to find call options that he thinks he can play for continued strength.
One play he had in common with other options players was buying the AOL April 85 calls, which were selling for around 10 ($1,000) as the stock rose 1 1/16 to 88 1/4 at midday. Volume at the 85 strike, especially in the March expiration month, was brisk. The March 85 contract's volume reached almost 2,000.
also was enjoying a good day and taking some options trade with it. The implied volatility that had roiled trading in the options earlier this year has subsided some, creating a better trading environment.
Today, the online bookstore's shares were up 3 5/16 to 128 1/4 and traffic in the March 130 calls had volume headed toward 2,000 contracts. The price of that contract was up 1 7/8 ($187.50) to 10 1/4 ($1,025) by early afternoon.
"The Internet stocks are up and the rest of the tech sector isn't.
is down 2 1/2 and AOL is up 1," Schultz says. "I would avoid call-buying in Dell or
because even if the stocks recover, the volatility could come in so much you could lose money on the option. When
volatility gets up this high, it can be risky."
The condition Schultz is wary of is the inflation in options premiums that comes with high volatility, which is usually brought on by a downturn. If the market changes direction, volatility won't be as high and that component of an option's premium will naturally decrease. With the VIX above 30, traders are wary of the impact that could have on long call positions.
Dell put buyers are somewhat happier. As the stock tumbled more than 2 to 79 3/8, the March 75 call, for example, saw its premium jump 1 ($100) to 2 7/8 ($287.50) as traders played for some continued weakness.