Strong Dow Pushing Volatility Lower

The VIX craters as call buyers storm the gates.
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As the

Dow's

march to 10,000 picked up momentum, options traders bellied up to keep buying calls as any remnants of caution disappeared.

The put/call ratio stood at 0.33, as almost 500,000 calls traded against just over 150,000 puts by midday. Reflecting the same sentiment among index option traders, the

Chicago Board Options Exchange

volatility index fell almost 7% to 24.04, as it moved decisively through the 25 floor.

"Breaking 0.25 is a good sign, and if we stay below that it would certainly be a better thing for the larger equity market. I don't want to give the illusion that is more than a predictive indicator," says Jerry Wang, market strategist with

Schaeffer Investment Research

. "And if the VIX keeps going down that will be bullish for the market. Then Dow 10,000 will be just another number."

The pros who took advantage of high options prices during Tuesday's selloff and sold puts and calls were looking even smarter today than they did during Thursday's rally. The price of the at-the-money S&P 100 index, or OEX, put fell 5 7/8 ($587.50) to 12 ($1,200) as concern about the direction of the market, and the subsequent need for hedging, evaporated.

At midday, the OEX was up 11.62 to just over 655.

With broader positions locked in, traders also spent the morning chasing rumor stocks. Among them were usual suspects such as

PairGain

(PAIR)

,

Ingram Micro

(IM)

, and

ContiFinancial

(CFN)

.

Ingram, for one, was up 1 1/16 to 19 3/8 this morning and options traders who had begun staking positions on Friday were enjoying the action. The April 20 calls that closed at 1 ($100) on Friday jumped to 1 1/4 ($125).

The volume today was hitting the April 25 calls, where volume of 550 contracts pushed the premium 1/8 ($12.50) to 3/8 ($27.50). The May 22 1/2 calls also moved, trading more than 700 contracts halfway through today's action.

ContiFinancial call premiums also spiked, but with its shares trading at just over 6, traders weren't chasing this one too far. The company's April 7 1/2 calls traded more than 142 contracts today and rose 1/8 ($12.50) to 11/16 ($68.75).

"It's a scary stock, all of those finance companies are," says one New York options trader, who claimed to have lost money trading the sectors in the past.

Options volume in

Rational Software

(RATL)

, a Cupertino, Calif., software manufacturer, popped up on radar screens this morning with heavy volume in the April 30 and May 30 calls. Volume in the April 30 calls totaled roughly 4,000, with volume at around 3,000 earlier in the trading day.

One trader said it was "hard to interpret" the action in Rational, but pointed out an announcement earlier Monday that the latest Microsoft Office 2000 will integrate Rational's Rose 98i, a visual modeling tool.