The Internet sector's sharp downturn this week may have shaken the equity players, but options traders seem to have learned long ago to price this kind of activity into their premiums.
Implied volatility in the
edged slightly higher, and the key fear barometer, the
Chicago Board Options Exchange
volatility index, gained 3.25, or 0.93%, to close at 29.58. But options on the Net stocks didn't show the same pop.
Street.com Internet Sector
index lost 26.38, or 4.57%, to close at 550.30 on Tuesday. Yet, for all of Tuesday's action, traders weren't sure what to expect today.
Net options trader was even predicting a bounce after some morning shakiness Wednesday because the "implied volatility in these Internet guys really wasn't going crazy," he said. "People were looking to unwind their calls -- the momentum players especially. It's the stocks themselves, moving 20 points a day, that are absolutely insane."
Premiums in those options have risen, but Watson Wright, a partner in
options advisory firm, shed some light on why options markets are reacting -- but not in shock -- to what Southerners like himself would call "chicken lickin'" in Internet issues.
premiums are higher," Wright said, but cautioned that the options market has been pricing in Internet stock option volatility -- both in rallies and selloffs -- for months now. "These tech and Internet stocks have been going down for weeks now, not just today.
stock has been down since it peaked in January," and options have been pricing that stealth slide already," he said.
Watson pointed to
as a prime example, even in light of its blue-chip status among the Net stocks. "Volatility is huge, but it has been for a while. The stock's only down 4 1/4 to 115 on Tuesday, but there are people out there who think it could go to 70," he said. "There are also people who think it could back to 150. And could do either, so that's why you've got these incredibly high premiums."
Out-of-the-money AOL October 150 calls closed at 12 ($1,200), down 2 ($200) even though it was 35 points out-of-the-money. But it's not far enough out for Wright to consider selling the options to grab some fat premium. "I, for one, wouldn't sell that for anything. I don't want to do that if I know AOL can go to 170," he says.
There were call writers working in AOL's June option on
Friday, and the wise ones seemed to be buying back their calls Tuesday to close them out and enjoy the quick hit. The June 130 calls, for instance, closed down 1 3/4 ($175) to 4 ($400) as open interest fell to 13,000 from 34,000.
Yet it was the near-term play in AOL that attracted the most traffic, in fact, landing the June 130 and 140 calls among the most actively traded Internet options.
In the shallow end of the Internet pool,
, options were more active than usual.
With just minutes left in the trading day, more than 3,000 July 100 puts traded as high as 6 1/4 ($625), up 2 1/4 ($225) on volume of 3,000 contracts, as the stock fell 3 1/8 to 97 1/4.
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"What a day," said the Pacific Coast options trader. "I was panting at the end of it."
Take a deep breath and get ready for more.