Put-Selling Gives Options Market a Bullish Feel

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Puts were still the name of the game as the options trading day came to an end. Retail investors, among others, clamored for protection against further decline in their stock portfolios, hedging some lowball bottom-fishing purchases made earlier in the day.

With the

Dow Jones Industrial Average

dropping as much as 175.63 during the session before recovering to post a more modest loss, investors grew divided over whether this dip was a buying opportunity or the beginning of big trouble. Both the

S&P 100

(OEX) index options and the

Dow Jones Industrial Average

(DJX) index options saw strong put activity

early on. At one point, puts outweighed calls by almost 2 to 1.

"Retail people tend to buy puts when the market is heading down and is more volatile," said Dennis Bein, a portfolio manager at

TSA Analytics

. The

volatility

(VIX) index climbed to around 26 today before settling back down to just above 23 at the end of the trading day. It was as low as 17 on Friday.

The market's drop made puts attractive, not only to some small investors who tend to panic more readily but also to bottom-feeding stock buyers who were scooping up the common stock at a low price and hedging with the puts. As a result, put prices climbed throughout the day, said Bein, who was in the process of executing a string of put-sells for customers.

However, as the Dow rallied to finish the day just 27.16 points down, option traders began to view things more optimistically. Bein said the market selloff that led to increased put activity and pricing also gave some investors an opportunity to sell portions of their long-term puts and lock in the gains. "A lot of clients think things have bottomed out for the next few days and they are booking gains," Bein explained.

Indeed, put-selling -- selling the right, but not the obligation, for someone to sell you a stock at a certain price -- is a bullish bet that a stock will not fall below the strike price. Of course, the put-buyer is counting on that same stock to drop.

In the pits in the

Chicago Board Options Exchange

, most traders had expected the rally in the last half-hour to lift the Dow. "We need more days like this," one options traders said.

Leading the volume in the put-selling was, naturally enough, the big-name tech companies, including:

Intel

(INTC) - Get Report

saw 9,063 contracts in its June 70 puts trade, under what looked like selling pressure, at around 1, or $100 per contract. The stock was at 74 1/8, down 9/16.

Dell's

(DELL) - Get Report

June 80 puts sold 2,111 contracts at 2 1/2.

Lucent Technology

(LU)

, which was active all day, saw 3,834 of its June 75 puts move at 5 3/4, although it was difficult to tell whether this also was a put-selling strategy.

Microsoft

(MSFT) - Get Report

, despite being leaned on by the

Justice Department

, saw about 5,450 contracts in its July 80 puts sold, and about 6,005 contracts in its July 60 puts bought -- possibly as a straddle between the two prices. Microsoft finished the day at 86, up 2 7/16.

In addition to the put-selling, option players also were engaging a similar strategy by using a buy/write -- buying the common stock and writing calls against it. In both the buy/write and put-selling strategies, investors are betting on upswings in the stock, and may face losses if the stock declines in price, said Leon Gross, options strategist for

Salomon Smith Barney

. "Investors were buying common, and then selling at-the-money calls," Gross said, adding they were benefiting from the high volatility because that made buyers for the calls easy to find. For example:

IBM

(IBM) - Get Report

saw its right-at-the-money June 120 calls move 2,079 contracts at 3 1/8. Big Blue's stock was at 120 1/4, down 3/4.

Cisco Systems

(CSCO) - Get Report

saw 2,691 of its in-the-money July 70 calls move at 9. Several CBOE traders suggested that an institutional player had been buying calls on Cisco during the last several days and that it was continuing to do so. Cisco's stock climbed in late-afternoon trading to finish at 77 13/16, up 1 7/8.

Digital Equipment

(DEC)

also may have seen some buy/write action as its July 50 in-the-money calls moved 8,564 contracts.

And there possibly was some bullish sentiment on a stock that hasn't seen much lately.

Cendant

(CD)

, still limping after disclosing accounting problems, saw a lot of action that looked to be buy/write activity. About 6,537 contracts of its June 25 calls were sold at a cheap 3/16, or $18.75 per contract, and 3,386 contracts of its in-the-money June 20 calls moved at 2. Cendant's stock was at 21 7/16, down 5/16.