Options Trading Shows Little Belief in Rally

Not everyone's convinced the market's coming back, traders say.
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As the

Nasdaq 100

took off Friday, some options market sentiment indicators eased, reflecting a measure of relief on the part of investors.

The

Chicago Board Options Exchange

volatility index, which traders use as a gauge of anxiety in the market, fell modestly. The VIX is based on options trading on the

S&P 100

. Generally, the VIX rises when put buying on the S&P 100 increases. A put option gives the purchaser the right but not the obligation to sell a security for a specified price by a certain time. For contrarians, low readings on the VIX are bearish, while high readings are bullish.

While the VIX has fallen today, it is still relatively high at 32.47. With many options market participants, the VIX has fallen out of favor, in part because volume in OEX options has declined significantly over the past few years, suggesting to many that the VIX may not be as reliable a sentiment indicator as it used to be.

"A lot of people aren't convinced

the market's coming back," says Scott Fullman, chief options strategist at

Swiss American Securities

, noting that investors want to see the

Federal Reserve

take some interest rate-cutting action. Some market participants believe that if the Fed starts lowering interest rates, that will then give the market a significant boost.

Meanwhile, the CBOE equity put/call ratio dropped markedly from Thursday's closing level of 0.61 to 0.43 late this morning, which means fewer people are buying put options. Investors buy put options to speculate on further downside for stocks and indexes, or as protection against a drop in the underlying securities that they are long. High readings in the equity put/call ratio are seen by contrarians as bullish, while low readings are bearish.

Overall, some traders said that action today was muted.

Pat Hickey, principal at market-making firm

Letco

, on the

Pacific Exchange

, said the market was "up on air today" and that "it doesn't feel like there's much volume." He noted that the market was oversold and that it got to the point where there was "nothing left to sell."

As usual, trading in options on the Nasdaq 100 unit trust, the QQQ, was active. The underlying QQQ was up $3.63 to $59.69. The January 60 calls were seeing solid volume with more than 5,600 contracts changing hands. The calls were up 1 1/2 ($150) to 4 1/2 ($450).