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Options Pros Take Moderate Selloff in Stride

Options pros continued to take the recent round of selling in the market in stride, noting that the market was due for a break considering how nicely stocks have done so far in 2001.

The moderate selloff, although not seen as horrible, has modestly perked up anxiety indicators in the options market. Over the past few days of selling, both the

Chicago Board Options Exchange Volatility Index

, or VIX, and the

CBOE Nasdaq Market Volatility Index

, or VXN, have risen. Generally, the VIX and VXN rise when the market tumbles. The VIX is based on

S&P 100

, or OEX, options prices, while the VXN is based on

Nasdaq 100

, or NDX, options prices. Options on the OEX and the NDX trade at the CBOE. The two volatility indices most of the time have an inverse relationship with the movement of the indices that underlie them. The VXN debuted this week.

The VIX illustrates the market's level of fear by rising when put-option buying increases on OEX options, showing an increasing desire to hedge via the options. A put option is the type of option that gives the purchaser the right to sell a security for a specified price by a certain date. Investors buy put options to either speculate on further downside for the underlying security or to use as insurance against a long position.

Traders interpret the VIX using contrarian theory, meaning exceedingly low readings on the VIX are bearish, while extremely high readings are bullish.

Rob Sorrentino of

Sorrentino Asset Management

, who only trades index options, said activity was light overall as traders await the

Federal Open Market Committee

meeting beginning Tuesday and ending Wednesday.

The recent market pullback was "in line" considering the market's year so far, Sorrentino said. He doesn't expect much activity in the market ahead of the FOMC get-together.

Sorrentino said a half-percentage point interest rate cut was already priced into the market. He said if the FOMC makes the call to trim the target on the

Fed funds rate by that amount, the market might simply remain stable. If the FOMC decides to slice the target by less, he expects a big selloff.

The Fed funds target rate, the interest rate at which banks lend to each other overnight, is at 6%.

Those making bullish plays on

Ericsson

(ERICY)

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Thursday were seeing their bets smack them in the face Friday.

Volume in Ericsson options was extremely heavy ahead of the Swedish mobile-phone maker's Friday

earnings release. On Thursday, call-option prices rose sharply along with a rally in the underlying stock. Friday, Ericsson shares swooned $2, or 15.4%, to $11.

The cell-phone maker reported net income that it said was in line with guidance, but it offered a less-than-gleaming outlook. Ericsson said an "uncertain" economic outlook and a more cautious capital market make the coming quarters cloudy. The company lowered its sales growth outlook for the first quarter to 15% to 20% from projections of more than 20%.

According to

McMillan Analysis

, a total of 68,726 option contracts traded on Ericsson Thursday, 58,694 of which were call options. The average daily volume for Ericsson is 13,192 contracts.

The Skupp-Seidman options team at

Miller Tabak

noted in a report to clients Friday that the price of the Ericsson call options rose markedly yesterday.

While people making bullish wagers on Ericsson were depressed, those who made similar bets this week on

Qualcomm

(QCOM) - Get QUALCOMM Incorporated Report

ahead of its earnings report Thursday were grinning Friday.

Investors were pleased that the wireless communications company

beat Wall Street's earnings expectation, even though its sales were lower than anticipated. But perhaps more importantly, the company noted that it was comfortable with analysts' estimates for the current quarter and year. Shares of San Diego-based Qualcomm surged $4.75, or 6.4%, to $78.69 Friday.

Earlier this week, some market participants said that there was a considerable amount of call buying in Qualcomm options. Among the options traders hungered for were the March 100 calls and the February 75 calls. Friday morning the March 100 calls were trading up 3/8 ($37.50) to 2 1/8 ($212.50) on the

Pacific Exchange

, while the February 75 calls were up 1 7/8 ($187.50) to 7 3/8 ($737.50), also on the P-Coast.

The

CBOE equity put/call ratio stood at 0.51, from a close of 0.56 Thursday. That means that 51 puts traded for every 100 calls traded so far Friday.

The 21-day CBOE equity put/call moving average, which is closely tracked by some options market strategists, as of Thursday's close was 0.567, according to

Schaeffer's Investment Research

.

The overall options market equity put/call ratio, which includes the numbers from all the nation's options exchanges, stood at 0.64.