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Nasdaq's Withering Rallies Lead Traders to Put Options

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Yes, for those who were long


names, Friday's rally was sure nice. But Monday's follow-up action, which saw the

Nasdaq 100

ending the day in the red after opening sharply higher, and Tuesday's downdraft could be harbingers of more of the same to come, at least if the options market is an accurate indicator.

Consider that the market's sharp, huge rallies over the past month or so after sustained periods of selling off haven't held, and the NDX has continued to make lower highs and lower lows. Not exactly the recipe for a run at the spring highs. On Tuesday, the Nasdaq 100 was off 3.1%, while the

Nasdaq 100 unit trust

(QQQ) - Get Invesco QQQ Trust Report

was down 3.6%.

Reflecting the uncertainty surrounding the market and expectations of more volatility ahead, Jordan Kahn of

Kahn Asset Management

said Monday afternoon that he's keeping his long positions hedged with put options.

"I certainly think it'll be volatile going forward," he said, pointing to uncertainties with the presidential election, the December

Federal Open Market Committee

meeting and the earnings preannouncement season, which begins next month. "I think it's going to be dicey," he said.

Kahn thinks the market is in a "no-man's land" and it's "likely we haven't seen the lows." As is usually the case, the market doesn't go down in a straight line, and the type and duration of bounces in between are difficult to gauge, he said.

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The apparent lack of fear displayed by some sentiment indicators amid recent selloffs has some in the market concluding that the market hasn't bottomed out and a further retest of the lows could be in the offing.

Kahn pointed out that the overall

Chicago Board Options Exchange

put/call ratio including index and equity options have indicated "tiny bouts of fear" recently, but "nothing that was sustained."

Contrarians like to see big amounts of fear in sentiment indicators like put/call ratios, suggesting that by the time people are flooding in to buy puts, jacking up that ratio, that the trend is poised to reverse itself. The larger and longer the amount of fear, the better, according to contrarian thinking.

The day before Thanksgiving, the overall CBOE equity and index put/call ratio closed at 0.83 before dropping to 0.59 in Friday's shortened session. Combine that with the overall 0.48 closing level Monday, and there still isn't much fear to be found. At 11:30 a.m. EST, the put/call ratio on index and equity options was 0.52.

It doesn't look like



has the strength to continue on the corporate world alone.

Hercules, a specialty chemical maker based in Wilmington, Del., on Tuesday morning confirmed that its board "has decided to consider the sale or merger" of the firm, news which boosted its stock a bit and juiced up interest in the stock's options.

Goldman Sachs

is advising Hercules.

"After careful analysis and consideration, we believe that the best strategic path for the company over the long term is to become part of a larger enterprise," said Chairman and Chief Executive Officer Thomas L. Gossage in a statement Tuesday.

Shares of Hercules were lately up 13 cents to $19.06.

Options action was notable on Hercules Tuesday. At the CBOE, 4,100 of the January 17 1/2 calls traded compared to open interest of 15 contracts, indicating the trades were the initiations of new positions. Open interest refers to the number of contracts created in a particular strike price and expiration month. The January 17 1/2 calls were down 1/16 ($6.25) to 2 3/4 ($275).

In late

October, the company announced it was pondering a "range of its strategic alternatives, including the possible sale of the company."

The debt-laden company completed a refinancing of some of that debt this month. Also, in an effort to save money, the company suspended its quarterly dividend.

Hercules' stock has had a nice run since late September, when it hit a 52-week intraday low at $11.38.