It seemed to be everywhere Thursday morning as the
options analysts shared mixed opinions on whether the day's pop was a good opportunity to take profits and hide from potential damage.
Still, as stock investors loved the Dow, loved
, and sheesh, even loved
, options traders weren't getting long and strong.
call options on the
index shares was huge, as major investment banks hit the market to buy April call contracts that expire two weeks from Friday.
Despite the rally, options activity overall wasn't off the charts, likely because speculators have grown wary of broad market rallies and are less likely to play for a big score by backing up the truck for
out-of-the-money call options.
"You have to use a bounce to take in some of these large premiums and sell options into the rally," said Michael Schwartz, the senior options strategist at
CIBC World Markets
Schwartz said investors would be wise to avoid joining in the upturn too enthusiastically, and instead sell call options at today's inflated levels.
Jay Shartsis, the options strategist at New York's
, said the fact that the
Nasdaq Volatility Index
, or VXN, was rising as the market rallied may be a sign that investors are still buying
puts on key Nasdaq stocks, something he sees as potentially a good sign.
"It's a continued, residual fear of the Nasdaq," he said, adding that during previous rallies in the midst of 2001's carnage, investors bought call options to try to get more exposure to an upswing. Little of that has materialized, but in this case, put buying signals that there's enough hedging going on now to justify a more sustained move upward.
Still, the calls on the Nasdaq index shares were in demand Thursday morning, no matter what was happening in the component stocks. Two major banks, traders said, came to the market to buy lots of several thousands of the April 40 and April 38 calls as the Nasdaq 100 index shares rose $2.35 to $36.40 by midday.
The April 40 calls, still a bit out-of-the-money (meaning the strike price is higher than the share price so the contract lacks intrinsic value), traded more than 15,000 contracts and rose 45 cents ($45) to 85 cents ($85). The April 38 calls traded 21,000 contracts and jumped 65 cents ($65) to $1.45 ($145) on the action.
While traders couldn't clearly determine if the call buying was connected to other stock or options positions, the banks could have been buying the calls to offset calls sold to them by clients. Increasingly, major investment banks take the other side of client orders, then hedge portions of those trades in publicly traded action.
Call sellers, in this position, would be taking in premiums such as the $145 per contract on the April 38 calls against the chance that the Nasdaq 100 index shares won't be at that level come April 20 expiration.