Confidence that the
Federal Open Market Committee
will cut the target on the fed funds rate by a half-percentage point has helped push options prices, which were already pretty low, even lower.
That complacency, however, may be a dangerous thing if the Fed doesn't deliver the kind of recession-proof guidance Wall Street is seeking. While options market anxiety indicators have also been falling lately, one options trader warned that if the FOMC doesn't cut the target to 5.5%, the market would likely "get rocked."
While prices for some index options have risen today, individual stock option prices in companies that are reporting earnings this week continued to be surprisingly low.
In general, options prices have been declining along with fear in the market as stocks have rallied nicely so far in 2001. When the market is anxious or nervous, options prices generally rise.
This is reflected in the
Chicago Board Options Exchange Volatility Index
, or VIX, which rises when put-option buying increases on options on the
(OEX). Investors buy put options to either hedge long positions or to speculate on further downside in the market.
While there was confidence that the Fed would do what the market is betting, it doesn't appear many traders are making last-minute wagers, as some said volume was rather light to kick off the week. The FOMC begins its two-day meeting tomorrow and concludes it on Wednesday. A statement on the results of the meeting is expected around 2:15 p.m. EST on Wednesday.
There was only slight volume in OEX at-the-money options Monday morning, unusual for a day leading into such an important Fed meeting. The OEX was up 0.42 to 709.48. The February 710 calls were down 70 cents to 14.80 ($1,480), on volume of 614 contracts, compared to open interest (the number of contracts in existence) of 1882. The OEX 710 puts were unchanged at 14 ($1,400) on volume of a little more than 250 contracts, compared to open interest of 1,803.
Implied volatility, a key component in an option's price and the estimation of future movement in the underlying security, has been falling lately. When levels of implied volatility get too low, traders get nervous and look at that as a harbinger of a potential downturn in the market.
The fact that the market's fear gauges have declined as stocks have enjoyed a good rally so far this year, has some options-market strategists on the lookout for a beefy selloff relatively soon.
In a research note on Friday, Bernie Schaeffer and Todd Salamone of
Schaeffer's Investment Research
noted that last Wednesday the
American Stock Exchange's
volatility index based on options on the
Nasdaq 100 unit trust
closed below 50; the last time that happened was on Nov. 3, which preceded a precipitous fall in the
Nasdaq Composite Index
. The Amex QQQ volatility index has the ticker symbol QQV.
That day, Schaeffer noted that the Comp closed at 3451 and within a month, the Comp had tumbled down to 2523.
Today the QQV was up 5.07% to 55.51.
The CBOE equity put/call ratio stood at 0.50, from a close of 0.57 Friday. The overall options market equity put/call ratio, which includes the numbers from all of the nation's options exchanges, stood at 0.62.
The 21-day CBOE equity put/call moving average, which is closely tracked by some options-market strategists, was 0.548 as of Friday's close, according to Schaeffer's Investment Research.
, one of the nation's largest options-market-making firms, announced Friday it hired Thomas A. Bond, the former vice chairman of the
Chicago Board Options Exchange
, to coordinate the firm's new business efforts.
Bond, an options industry veteran and CBOE member since 1975, remains a CBOE director, a position he has held for 14 years.
In part, Bond will coordinate the firm's marketing, public relations, information technology, trading desk and electronic trading, Letco said. In 2000, Letco traded more than 40 million option contracts and more than 1 billion shares of stock.