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Options Pros Say Traders Are Loath to Fear Too Much

Volatility is up, but not as much as some expected.

Looking to take advantage of Thursday's volatility? One day later, this could be your chance.

Volatility, a key factor in pricing options, spiked during the late selloff Thursday, and so far it is a dead giveaway that the collapse in technology stocks isn't grabbing investors by their fearful lapels.


Chicago Board Options Exchange's

volatility index, or VIX, a broad measure of the fear in the stock market, clocked in at above 30 at the close Thursday -- the first time it had done so since March 2, one institutional options strategist points out.

"Thursday, the volatility actually didn't go up more than we expected. It wasn't as if there was a panic. There was not much hedging at all in the


, even though we had a lot of volume this morning," said Leon Gross, an institutional strategist with

Salomon Smith Barney

in New York.

The VIX spiked up to as high as 32.33 before settling at 30.53 at midday Friday. And Gross adds that there are customers lined up "ready to sell volatility" -- meaning they are ready to sell options at higher prices factoring in the stock market's fear, with the expectation that those prices will deflate and they can potentially buy back those options at lower prices.

Anecdotally, strategists and traders agree that "there is simply too much cash on the sidelines" for the collapse to happen -- at least before Halloween, said Kyle Rosen with

Rosen Capital Management

in Los Angeles.

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How can you tell that the collapse in tech is short term? Because options just aren't pricing in the fear factor. Given that the Nasdaq Composite is edging toward a key support level of 2621, for instance, there should have been more hedging in the

Nasdaq 100

, or NDX, index on Thursday and Friday.

But trading in the NDX, down 5.4 to 2397, just didn't go off the charts.

"The thing that surprised me? Prices on NDX puts were cheap, almost the same price as the


puts," said Rosen. "It was a great arbitrage: Sell S&P puts and buy NDX puts; they were trading at the same price, but the NDX would go down faster. NDX puts should have been trading about 30% to 40% higher, but they weren't." Implied volatilities on NDX out-of-the-money puts totaled about 40 (that's a percentage implying how much the underlying stock is expected to swing on an annual basis). "The volatility could have gone to 45 or 50," Rosen said, indicating investors were willing to pay up for protection, "but it didn't."

"In the short term, it's positive. It means people don't think there's a collapse coming," Rosen said.

NDX at-the-money October 2380 puts rose 8 ($800) to 80 ($8,000), while the out-of-the-money October 2180 puts, for instance, shot up 12 ($1,200) to 21 1/2 ($2,150). On the S&P 100, the near-the-money October 675 puts actually dropped in price, losing 1 1/4 ($125) to 16 ($1,600) on some of the heaviest trading volume in the option.

If you buy Rosen's argument and think there's limited upside left in some of the big Nasdaq tech issues, then selling puts and buying calls would be the game.

"If you don't want to miss it, start selling October 65 and 70 puts in say,



, and buying calls. You still get to play the short-term rebound." Bullish option investors can sell puts on Intel with the idea that they will expire worthless.

Intel, a Nasdaq heavyweight, was down 2 3/4 to 74 11/16, and the October 65 puts were up 3/16 ($18.75) to 3/4 ($75). The October 70 puts edged up 1/2 ($50) to 1 11/16 ($168.75).