Options Pros Try to Get a Step Ahead of the Fed

The guessing about Greenspan has traders in a bind.
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What will

Federal Reserve

Chairman

Alan Greenspan

do tomorrow? Perhaps only his TV newswoman wife Andrea Mitchell knows for sure. But even that's a long shot.

"Bulls and bears both are probably feeling like deer frozen in the headlights," said Greg Simmons with

Linear Capital Management

, a hedge fund specializing in index options. The possibilities are finite, but the market's possible moves after Tuesday's

Federal Open Market Committee

meeting definitely are not.

Scenario 1: "Say Greenspan doesn't raise rates; that may be as bad as an unsuspected rate hike," said the head of one institutional options trading desk. "It could even have more of an impact. It's eerily quiet for such a day."

Scenario 2: If the Fed doesn't raise rates but changes its bias, the stock market may interpret that as a party-pooper sign.

Scenario 3: The Fed raises rates by 25 basis points, and then? "It's party time until Y2K," the institutional options trader said. "We could see the market up 5%, even 10%, because the rate hikes would be over" for the foreseeable future.

Index options, oddly enough, weren't giving up many hints as to a bias. Checking the

S&P 100

index options, November at-the-money 730 OEX puts and calls were both slightly lower in price, at 6 3/4 ($675) and 7 3/4 ($775), respectively.

Simmons for one was throwing a wide net, trying to sell some options to pay a long position he's built up leading into tomorrow's Fed meeting. The index was sitting at 1396.

"The market has such potential to break out and go, or get cratered on the news. The potential to go either way right now is heavy," he added. "The market's personality is so split right now -- the world was coming to an end two weeks ago, and now we may go to the moon." Moreover, he added, "There could be a leg down sometime going into the holidays, before a Christmas rally, because that probably won't happen off of these new highs."

Simmons also sold November 1400 puts to capture some premium in the case of some short-term upside in the market this week and was short January 1275 puts as well. "I'm all over the map."

A few other indicators are troublesome: the stock market's fear barometer, the

Chicago Board Options Exchange's Volatility Index

, was up 1.04 to 22.72, despite the fact that the omnipotent

Nasdaq

was hitting new records.

Moreover, the tech-sodden Nasdaq was riding higher -- not due to the usual suspects such as

Microsoft

(MSFT) - Get Report

,

Intel

(INTC) - Get Report

and

Dell

(DELL) - Get Report

-- but from zingers such as

Qualcomm

(QCOM) - Get Report

, Simmons added.

Among individual options, options on chip company

Rambus

(RMBS) - Get Report

spiked up on no news and in spite of a

downgrade on client Intel. Rambus shares were up 3 7/16 to 91 1/4.

The most active were the December 80 puts, down 2 7/8 to 4 on heavy volume.