Halfway through trading today, options pros weren't seeing the kind of volatility and index-option premiums that go with a big selloff. By 3:30 p.m. EST, that had changed.


Chicago Board Options Exchange

volatility index rose slightly this morning before around 3:40 popping over 30 for the first time in weeks. (It hasn't closed above 30 since mid-February.) It didn't stay long at that level, but the move was enough to send a message to traders. "We're at an impasse now," says Greg Simmons, a portfolio manager at

Linear Capital Management

and an index-option trader. "Either we're going to trend down or people are going to buy the dip."

The VIX is calculated using the prices of eight near-the-money

S&P 100

options. A rising VIX illustrates fear in the market, while a low VIX suggests complacency. The VIX closed at 29.11, up 2.46 or about 9% on the day.

That fear was being driven by anticipation of military action in the Balkans, and that affected the demeanors of index-futures and options players. The action was generally broad, and according to traders, there wasn't any "size player" who pushed things around in the afternoon.

Simmons says the mood he picked up from the Chicago pits today was "hypercautious." One major index trader in New York says he saw "a lot of nervousness in the futures. They started selling some off, and then buying a little back toward the end."

"Basically what we were doing today was getting ahead of what everyone has anticipated," the New York trader says.

That was a stark contrast to the relatively mild trading in the index options this morning. The index put/call ratio ended the day at 1.61 at the CBOE, showing 161 index puts trading for every 100 index calls. On Monday, the index put/call ratio closed at 1.40. While strategists and traders usually discount the index put/call ratio because it includes a good amount of hedging, that action takes on a different complexion during a significant slip in the Dow.

The put/call ratio for equity options ended the day at 0.52, a mark that also reflected a greater appetite to play the downside of the market or hedge long positions.

That desire to hedge drove up put prices on the OEX and SPX options, which in turn drove up the VIX. Simmons, for one, was keeping a close eye on the indicator: "If it goes up and tests 34 or 35, I'd be skittish if I were short," he said. But "if it snaps that high, you've got to start covering shorts."