Options Plays Don't Budge VIX from Low Levels; Drug Plays Continue

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Everybody is happy today, maybe a little too happy.

Options traders are reporting a

Chicago Board Options Exchange

Volatility Index (VIX) that has barely budged from its Friday close of 21, a sign that today's rally has all but eviscerated concerns about Asia and White House sex scandals, at least for the day. "Based on the VIX, it looks like a complacent period," said

Wall St. Access

senior trading adviser Tom Burnett. "For a market to be up 2% and VIX to be unchanged tells you put buying has gone to sleep." The OEX was up 8.5 to 477.30 this morning.

The VIX is based on put buying in the

Standard & Poor's 100

stock index, and today put prices were getting "crushed" while out-of-the-money calls on the OEX were rising in price and building in volume. While volume was heavy in near-the-money puts, mostly the February 470 series, the price on the contract had fallen 2 5/8 ($262.50) to 5 1/8 ($512.50). Most OEX players were targeting the out-of-the-money calls, as they see a rally picking up some steam. Volume on the February 480 calls reached 5,200 and the 490 calls broke 4,300 near midday.

Thomson Financial Services

analyst Jerry Hegarty said he was surprised the VIX hadn't budged but that today's rally had legs. "The last four days in January set this up," he said. "But what we've done today is basically jut hold the opening gains."

The drug sector, boosted by the merger of

Glaxo Wellcome

(GLX)

, in the center of takeover rumors on Friday, saw new strike price options at 45 go relatively untraded. Pharmacia was up 1 9/16 to 40 1/8 today. On Friday, its February and March 40 calls were among the most heavily traded options contracts, sparking speculation that

Merck

or another major pharmaceutical company was readying a bid.

Pfizer

(PFE) - Get Report

, up 2 1/2 to 84 1/4 near midday, saw some interest in its February and March 85 calls with a combined 1,200 contracts trading at the strike price. "There's just tremendous momentum in the group," Burnett said of the big pharmaceuticals activity. "But people have priced so much optimism into this thing that I think it's a little overdone."

Banking stocks are also enjoying a strong day as Asian concerns abated for now, but options players, surprisingly, weren't swooping in to speculate.

Chase Manhattan

(CMB)

,

J.P. Morgan

(JPM) - Get Report

,

Citibank

(CCI) - Get Report

and

Bankers Trust

(BT)

were all up significantly but showed little or no out-of-the-money call action.

In other options activity:

The options market gave a strong reaction to a cost-cutting plan by

Hewlett-Packard

(HWP)

. HP's shares were up 1 15/16 to 62 1/16 this morning but the February 65 calls showed volume of 3,257 and a price jump of 5/16 ($31.25) to 1 1/8 ($112.50).