Buyers may be chasing
stocks in big numbers Tuesday, but options traders are still generally paying more for puts than calls, suggesting continued anxiety that the tech sector remains vulnerable to another tumble.
Both call and put options prices declined overall as stocks advanced. Also, part of the decline in options premiums is because the busiest portion of earnings season is now past. Options prices generally become inflated ahead of a company's earnings report.
That occurs because earnings often prompt dramatic moves in the underlying stock, and sometimes the sector the stock is in, making the leverage options provide essential. After a company reports earnings, typically, the options prices drop.
Traders said this morning that prices on put options -- typically used to hedge stock positions or speculate on a drop in a stock or index value -- are still generally higher than call options. Investors buy call options to speculate on a surge in a stock's price.
"Market makers don't want to sell the puts cheap," said Alan Goldstein of
Five Dollar Trading
in Chicago. The reason: the risk associated with big moves -- mainly down -- that can stick a market maker owning a stock (the possible end result of selling a put) that's falling. Put sellers get paid to take on the obligation of buying a stock for a preset price, a level that can easily look inflated in a falling market.
Goldstein said that the skew in price between calls and puts is being seen on tech stock options such as
. In Cisco options, he said the skew was pronounced. Market makers making the price of the puts more expensive than the calls suggests fear there will be a down move in Cisco, and the professional traders want to get paid more for the risk of owning a potentially weak stock.
Cisco's stock fell markedly Monday after
sliced its price target on the network equipment maker to $60 to $65 from the previous target of $90. Cisco was rebounding Tuesday, up $3.31, or 6.9%, to $51.38.
The price of Cisco options is high in general because the company is slated to post earnings after the close Monday. The
First Call/Thomson Financial
32-analyst estimate calls for Cisco to earn 17 cents in its fiscal first quarter. The company earned 12 cents in the year-ago period.
One Wall Street options trader said that people jumped back into Cisco Tuesday after its stumble yesterday thinking the stock was cheap. The trader mentioned that "no one" thinks the stock will fall to $40 and that $40 is a "dead line" and that the stock would find support at that level. Open interest in the November 40 puts totaled a little more than 22,100 contracts as of Monday's close.
The heaviest volume in Cisco options was on the
Chicago Board Options Exchange
for the November 50 puts, where 5,463 contracts changed hands. The puts fell 2 ($200) to 3 1/2 ($350).