Investors thinking about placing some bets that the market's selloff -- particularly on the
-- might be close to being over may want to think twice, according to some options pros.
Market indicators used by options and equity market to determine if a selloff might be over aren't pointing to the pain ending just yet. Contrarian traders, who take the opposite wager of where the majority of investors are betting, aren't being comforted by the market's recent action.
One market indicator that contrarians use is the
Chicago Board Options Exchange
equity put/call ratio. When the put/call ratio gets very low, meaning there are more call option buyers than put option buyers, it suggests that investors are too comfortable, a classic warning sign to contrarians. (Call options rise with an appreciation in a stock or index while put options will rise with the depreciation of a stock or index.)
When the put/call ratio gets too low, contrarians see that as a sign of a selloff in the offing. Conversely, when the put/call ratio gets too high -- illustrating broad investor concern -- it suggests that selling may be nearing exhaustion and the market may be ready to rally.
Judging from the relatively low level in the put/call ratio Friday, it doesn't look like there's going to be much rallying soon.
"There's not been a lot of put-buying," said Jay Shartis, the options strategist at New York brokerage
. He said that was "the major thing disturbing me."
CBOE Volatility Index
, which options traders use to measure the level of anxiety in the market, has spiked up Friday. It's still, however, a mile away from so-called "panic" levels that were seen this spring during the market's drubbing. (See chart above)
Elsewhere in the options market, it appears options traders aren't taking much of a position on the proposed
, which was
announced Friday morning.
Under terms of the proposed deal, Alteon shareholders will receive 1.83148 shares of Nortel stock for each share of Alteon they own. Based on Nortel's closing price of 78 5/8 a share Thursday, Alteon shareholders would receive 144 a share in Nortel stock, a paltry $1 premium to Alteon's closing price of 143 Thursday. But currently, based on the trading of Nortel's stock Friday, the amount Alteon's shareholders would receive in the deal would be about 134.84 a share.
While the options market isn't giving a clean sign of what it thinks of the deal, trading in the underlying stocks is showing a crystal-clear picture of displeasure with the takeover. Both Nortel's and Alteon's stocks were getting hammered. Nortel was down 4 7/8, or 6.2%, to 73 5/8, while Alteon was off a whopping 13 1/8, or 9.2%, to 129 7/8.
Philadelphia Stock Exchange
floor source said that there wasn't much direction either way in the flow on Nortel options.
The heaviest volume in Nortel options was in the September 70 calls on the
American Stock Exchange
, where nearly 7470 contracts have changed hands. The calls were trading down 4 1/2 ($450), to 8 ($800).
Options activity in Alteon has been relatively light, with no specific strike price on the stock's options garnering much attention.
Alteon makes Web data center products, including Web switches, server adapters and traffic management software. The deal is expected to close in the fourth quarter of 2000.