Options Volatility Recedes, Call Sellers Still Active

Microsoft, Philip Morris options stay active.
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A roaring Friday in

Nasdaq

land was soothing options traders as the memory of Tuesday's dramatic swings in the tech sector continued to fade.

With the

Nasdaq Composite Index

up about 3% early Friday afternoon and the

Nasdaq 100

up 3.5%, the market in general and the options market were feeling a lot better than they were earlier this week amid the market's massive selloff. But the decrease in anxiety for contrarians could portend selling on the horizon as traders and investors become too complacent.

Options traders and market watchers pointed out that implied volatility levels in tech-stock options have fallen off a good deal compared with the heightened levels earlier this week. Implied volatility is the annualized measure of how much the market thinks a stock can potentially move and is a key factor in an option's price.

Dan Brady, of

Letco

market makers in San Francisco, said volatility in technology names was decreasing from levels seen during the week's early market turmoil. Brady said there were a lot of call-option writers in the market Friday, playing on the sense of security that was setting in.

As for volume, which was a problem earlier this week (particularly Tuesday, when delayed quotes were a problem for the market), volume Friday was light.

"It's very quiet," said Brady.

Volatility in

Microsoft

(MSFT) - Get Report

options was down sharply from Monday, noted Paul Foster of

1010WallStreet.com

in Chicago. He said volatility in Microsoft has fallen to 49 from 67 on Monday, when a Federal court ruled against the software giant in an antitrust case. Microsoft was up 5/8 to 86 5/8.

Volatility typically rises when uncertainty surrounds a stock, and as the market waited for the court's decision, implied volatility levels stayed high. Once the decision came down, any uncertainty surrounding Microsoft seemed to disappear.

Elsewhere, Foster said put-option volume in

Philip Morris

(MO) - Get Report

stayed strong Friday.

He pointed out that 8,500 contracts had traded on the put side by midday, and "that's relatively aggressive." Foster, who is long Philip Morris, said that he was surprised the implied volatility of the options haven't gone up more.

A jury in Miami is currently deliberating compensatory damages for some sick-smoker plaintiffs in a trial against the world's big tobacco companies, including Big Mo. Shares of Philip Morris were up 1/16 to 23.

The company's June 17 1/2 and 25 puts each traded about 2,500 contracts by midday Friday, despite a recent wave that's seen Philip Morris bulls actively buying calls.

Over the past two weeks, there has been considerable action in Philip Morris' April 22 1/2 calls. Open interest as of Thursday's close stood at 43,294. One

American Stock Exchange

trader, when asked about the call buying, said the speculation was signaling that traders thought the stock has "seen the worst."