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OEX Put Buys Serve as Fed Insurance

Options traders stay wary ahead of the Fed's decision.

If you thought insurance salesmen were a lost breed, take a quick look at the options market today. Everyone is looking to get in on the protection game.

After the two-day

Federal Open Market Committee

meeting ends, what kind of insurance can investors turn to if the hoped-for stock market rally doesn't materialize? Realistically, "if you own stocks here, you have to be defensive, and if you're planning to go on vacation, you wouldn't want to be long only in your portfolio," says Scott Fullman, options strategist at

Swiss American Securities

.

Yet, with the event looming, the Volatility Index hasn't moved much relative to its swings in recent days, an indicator that most pre-

Fed

hedging was taken care of earlier.

One insurance policy is buying puts on the

S&P 100

and

S&P 500

. "Why take a chance leaving your positions exposed? Try to match up an index put against the portfolio, whether it's broad-based blue-chips or more narrow, like heavy in technology stocks, and buy an index put through August," Fullman adds, since there are only a few weeks left until the July 16 options expiration.

But remember, you don't buy tornado insurance hoping a twister blows the house across state lines. So, traders warn, be prepared to sell these puts and reinvest the proceeds into the portfolio if the stock market does rally.

Among the more popular are puts on the OEX, or S&P 100, and the

Morgan Stanley High Tech Index

.

With the OEX trading at 687.3, the July 685 OEX index puts were trading at 10 3/4 ($1,075), up 3/8 ($37.50) on volume of 1,221. They were among the most actively traded OEX index puts along with the July 670s, which rose 5/8 ($62.50) to 6 3/8 ($637.50) on volume of 1,396.

If the put buyers don't get the fall they're expecting, the subsequent moves are obvious. "If the market goes down, you're got protection. If it doesn't, you sell those puts and reinvest the money in stocks and options. To me, that's a small amount to pay when you've got the gains we've had," Fullman says.

Corning

(GLW) - Get Corning Inc Report

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call buys late last week turned immensely profitable Wednesday morning.

A trader on the

Chicago Board Options Exchange

said Wednesday that

Morgan Stanley Dean Witter

double-dipped in Corning calls, buying longer-term contracts after trading in and out of the July 60 calls, which were up 4 1/2 ($450) to 9 3/4 ($975).

Good timing. Corning shares glided up 4 3/16 to 69 3/8 on news Wednesday that the company's products will be used by the developers of the largest European broadband network.

Those same July 60 calls last

Friday were trading at 2 1/8 ($212.50) and by Monday had risen to 3 1/8 ($312.50).

Small biotech

Enzon

(ENZN)

and software maker

Remedy Corp.

(RMDY)

got attention from call buyers.

With its shares surpassing their 52-week high, Enzon calls have grown pricier. The stock hit an intraday high of 21, but had come in a little to 20 7/16, up 1 7/16, at midday. The July 20 calls gained 13/16 ($81.25) to 2 1/8 ($212.50).

Enzon has been picking up steam in the wake of an agreement to receive higher royalty rates from

Schering-Plough

(SGP)

on a hepatitis C drug still in clinical trials.

Calls in Remedy also grew richer, with the stock up 1 7/16 to 25 1/6. July 25 calls more than tripled in price, up 1 3/16 ($118.75) to 1 11/16 ($168.75) on thin volume, just 40 contracts. August 25 calls gained 3/4 ($75) to 2 7/8 ($287.50) on volume of 100 contracts and open interest of 250.

In options on smaller stocks, price changes tend to say more about a company's prospects than the volume numbers. The price increases show increasing desire to get a position and the leverage an options buy brings.