rally continues unabated, the
may be replacing other index options as the market's favorite hedging tool.
It may be heresy to even consider such a thing, but the numbers are telling an interesting story in the options market. Trading in the Q, as it's known on the
American Stock Exchange
trading floor, has been setting volume records all week and could one day surpass trading in the market's old reliable
Options strategist Jerry Wang with
Schaeffer's Investment Research
in Cincinnati pointed out that volume in
averaged 5 million for the past five to six trading days, while QQQ shares averaged about 11 million. SPDRs are Standard & Poor's Depositary Receipts based on the S&P 500 index. The Nasdaq 100 unit trust, or QQQ, is based on the Nasdaq 100 index.
Trading in QQQ options was also healthy, at more than 214,000 contracts so far in December. That is still paltry, however, when compared with the SPX options traded in December -- more than 925,000 contracts.
It's much too early to dismiss the key S&P indices and index options as out of date and not reflective of the "new economy." The
index, the OEX, is still a powerful indicator, particularly when so many index funds are buying and selling in and out of the options and the underlying stocks as a hedging tool.
Today's triple-witching expiration -- the expiration of equity options, index options and index futures -- is proof of that power: If the S&P 100 kicks up over a key 780 level Friday, options gurus predict, the market will likely rally even further.
That's in part because of what is known as program trading. Money managers and individual investors who mirror the S&P likely are the same investors who are buying and selling December OEX call options. Traders who sold those index options to investors -- roughly 13,000 of them, according to the open-interest tally of the December 780 call options -- will have to buy more of the underlying stocks in the S&P index to deliver on those calls. A call option is a contract between the buyer and seller that gives the buyer, or owner, the right to buy a stock or an index at a predetermined time in the future. The seller has the obligation of delivering those assets -- in this case, cash -- if the options land in the money.
That expiration is today.
Among the most active of the OEX options traded Friday were the December 775 puts. If investors bought these puts, they were wagering the OEX index would fall to that level by the close of trading Friday. However, the stock market has rallied, and the OEX was up 5.4 to 777.4.
Roughly 13,000 December 775 puts traded by midday Friday, with open interest of just 2,100. The price of the puts slid 4 1/4 ($425) to 3/4 ($75). Sellers of those puts are likely to buy them back to close before the end of the day for a lower price and take home a nice one-day gain, and protect themselves from a quick turn at the end of the session that would make those options worth more to the original buyer.
But there's no denying that, on trading floors around the country, the Nasdaq's 66% rise in 1999 and the swiftness with which the big technology components in the Nasdaq achieved those gains were becoming all-important factors.
"Traders I've talked to think the volatility
of the Nasdaq is a good sale at these prices," said one American Stock Exchange market maker. "Except for Y2K, there doesn't seem to be any news event in the near term that would be capable of shattering the techs."
In other sectors such as banking, volatility of the underlying stocks has been steadily rising as customers and firm orders are predominantly on the buy side.
But, oddly enough, the volatility of the broader market hasn't seen the same spike. That's generally measured by the
Chicago Board Options Exchange's
volatility index, the VIX. The VIX is calculated using OEX options.
Wang, for his part, said the trend he's noticed is that, on a historical basis, the OEX historical volatility since Nov. 29 of this year has been in a range of 14 to 15. That compares with the Nasdaq's historical volatility, which totaled 25.5 since Nov. 22 and 31 as of Friday.
"You arrive at that figure by looking at the NDX and looking at the move in the index over that period," he said. "In general, we can say that the Nasdaq has been more volatile than the larger market. Maybe we should reference the Nasdaq 100 as a large-cap tech vs. the S&P 100 as the large-cap broad."
Either way, it's going to be good to be king.