Options Market Jittery, Though Some See 'Cleansing Period' - TheStreet

A flare-up of

tension in the Mideast has left options traders confused and distracted with little indication of where stocks are headed, although some market observers continue to see signs that the market has appeared to bottom out.

The situation in the Mideast was a mess Thursday. Israel, after two of its soldiers were killed by Palestinians, launched helicopter attacks on the Gaza Strip and the West Bank. Meanwhile, the U.S. Navy said that a rubber raft carrying explosives ran into a U.S. Navy destroyer and exploded, killing at least four sailors. The destroyer was refueling in a port in Yemen.

Signs of marked anxiety was apparent in some options-market indicators as stocks sold off on the Mideast news, a spike in oil prices and continued jitters over the corporate profit picture. The signs of continued fear, for contrarians, is good news. The worse the sentiment on stocks, the closer the market is to turning a corner and rallying, or so contrarian theory goes.

The

Chicago Board Options Exchange Volatility Index

, or VIX, which some watch as a gauge of the market's anxiety level, was on the rise again, a good sign for contrarians. (The VIX rises when put option buying increases on options on the

S&P 100

, or OEX.) For contrarians, low readings on the VIX are bearish, while high readings are bullish. During the April selloff, the VIX spiked as high as 41.53. At midday, the VIX was at 33.24, up 7.4%.

A put option is a type of option that gives the purchaser the right but not the obligation to sell a security for a specified price at a certain time. Typically investors buy puts to either speculate on a downdraft in a stock or index price, or to use the option as protection against a long stock position.

Some options pros watch the VIX with a skeptical eye, however, because volume in OEX options has declined significantly over the past few years, suggesting to many that the VIX may not be as reliable a sentiment indicator as it used to be.

Paul Foster, of

1010WallStreet.com

in Chicago, said that options volume on the OEX was heavier than last week and added that the action has the look of panic. "Maybe this is a cleansing period," he said.

One market maker on the

Pacific Exchange

said that although he was seeing some huge trades, the trades weren't indicating people making huge wagers on the market going forward.

Some strategists noted that they've been getting a lot of queries from people about buying puts for protection against long positions in stock, a good sign, from a contrarian point of view.

Michael Schwartz, chief options strategist at

CIBC Oppenheimer

, said that in only the last couple of days, the bulk of people's inquiries have been to buy puts to hedge their portfolios.