Options Traders Seeing More Pain for Techs

Tech stocks slip into the red after eBay's earnings worries.
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Tuesday may have been a landmark day for tech stocks, but Wednesday has brought expectation of more pain in the sector's key names.

The initiation of


(MSFT) - Get Report



(INTC) - Get Report

into the

Dow Jones Industrial Average

provided a ray of light in an otherwise gloomy sector. Wednesday morning, however, the tables turned early as

Goldman Sachs

analyst Rich Sherlund took a cautious approach to the short-term future of Microsoft. That was enough to spread depression into the top tier of tech firms.

After disappointing earnings from


(DELL) - Get Report

, Intel and


(IBM) - Get Report

, "Microsoft kind of saves the entire industry, stockwise," said Kyle Rosen of

Rosen Capital Management

. "Now, if Microsoft isn't healthy, then who is?"

Morgan Stanley Dean Witter

downgraded IBM Wednesday, which apparently pulled down its hardware colleagues, such as




Yet Goldman was an early seller of November 85 and November 90 puts, at 2,000 and 1,250 contracts in each strike, and other orders were also from big institutional players.

"The divergence is growing wider between the Nasdaq and the other indexes," said a

Pacific Exchange

index trader.

Beyond the slices off the stock prices of names such as H-P, Intel and Microsoft, the options market showed few signs of optimism.

Put action was paramount.

With its shares down 1 13/16 to 68 5/8 at midday, Intel's out-of-the-money November 65 puts traded almost 1,500 contracts and spiked 3/8 ($37.50) to 1 1/4 ($125). The November 70 puts jumped 13/16 ($81.25) to 3 1/8 ($312.50).

Put-buyers swooped in early on Hewlett-Packard contracts, sending volume on the in-the-money November 85 and 90 puts into four-digit territory before the first hour of trading was done.

Microsoft, which confirmed Wednesday morning that Windows 2000 would be delayed, got the same bum's rush treatment. Put-buyers snatched almost 4,000 at-the-money November 90s, sending the price up 11/16 ($68.75) to 2 3/4 ($275).

"I think the behavior is completely rational here. I completely understand it," Rosen said. "The last rally the techs had now looks like a failed rally, so why not protect yourself and buy some puts?" Further protection could be getting out of the stocks altogether, but Rosen says that's unlikely because of the quality the names represent and their potential to bring in big returns if current concerns wane.

Gee? No, GDP

Rosen said traders anxiously are watching for tomorrow's

Employment Cost Index

report and


numbers for any signs on where the economy may be headed.

Another interesting development is that call-buyers have been hard to find, something Rosen attributed to the big investors staying long the stock with little need or desire to get any further. "I'm actually surprised the puts aren't trading higher

in price; there are a lot of itchy trigger fingers out there," he said. "Something could happen as quickly as tomorrow."

Big Red

The e-gang has struck again in options, and this time, the bias looks like it's going to the downside for some time.

Earnings from


(EBAY) - Get Report

Tuesday set the stock on a downward tear, and comments from the chief executive didn't help on Wednesday, so the rest of the Internet sector took its cue from the auction site company and rolled down into the red.





(AMZN) - Get Report

, eBay and

America Online


all sank Wednesday on what appeared to be a slightly gloomy outlook for eBay, and Amazon's earnings upcoming will likely determine the outlook for the sector one way or the other this week.

But in the options market, certainty appeared to solidify among options traders that the Net sector has found its direction -- and that would be down.

Buyers of puts in Amazon stepped in early in the trading session in the November 60 and 65 strike prices, with the stock down 4 1/4 to 77, with most of the interested buyers placing their bets on the

American Stock Exchange

and the

Chicago Board Options Exchange


"Volatility in options like those of Yahoo! is getting crushed," said Barry Goren, an independent market maker on the Pacific Exchange in San Francisco who recently was awarded the right to trade H-P options on that exchange. "No one can figure out why on the surface, especially since Amazon reports today, but my feeling is that it's come down because people's uncertainty about the direction of the stock is going away."

In other words, volatility -- a key worry measure in that it gauges the percentage the underlying stock is expected to swing on a yearly basis -- is shrinking. Volatility is one of the most important factors in pricing an option. When option traders are uncertain about how much the underlying stock will move, they will ratchet up volatility in the price of the options they buy and sell. When they are more certain about the direction, they can afford to lower that volatility factor, even when it means the stock is due to drift down.