There was some interesting activity to watch: A huge buyer stepped in to buy 4000 Home Depot ( HD) out-of-the-money March 50 puts. With Home Depot shares up 7/8 to 55 3/8, the March 50 put is currently fetching 1 ($100), down 1/16 ($6.25). The buyer is speculating that Home Depot's shares will fall to 49 by the third Friday in March or slide close enough to 50 to push higher the value of the March 50 puts, which give the buyer the right to sell Home Depot shares at that price by expiration. On the more bullish side, some options traders were jumping on the biotech bandwagon by playing one of the industry's biggest firms, Amgen ( AMGN). Friday volume brought a 3000-contract trade in the out-of-the-money March 80 calls, which were up 7/8 ($87.50) to 3 3/8 ($337.50) as the stock reached 75. The open interest in that strike price totaled just 1380 contracts. The calls give the buyer the right to buy Amgen shares for 80 by the third Friday in March. It would be a profitable endeavor if the stock landed at about 84 on that day or rose enough to carry the price of the option higher.
Meanwhile, the market's fear gauge, the Chicago Board Options Exchange Volatility Index, or VIX, has been creeping higher. The VIX closed Wednesday at 25.10, at the top of its typical range of 17.0 to 25.0, but well below the 45-to-50 levels touched in 1998. "According to our research, the VIX appears to be understating market worries a bit," says Lance Ettus with ValueLine Options in New York City. Friday, the VIX hit an intraday high of 26.35 before settling back to 25.86, up 3.15%. Further evidence that options are expensive: Ettus also points out that the average three-month put-and-call time premiums of all the options ValueLine follows are at their highest levels since the 1987 crash -- even higher than they were during the financial crisis of 1998. (Premium is the cost of an option). "The reason for this discrepancy between the VIX and these average premium levels is the divergent market we are seeing these days," he continues. His argument goes like this: The low correlation of very volatile stocks within an index tends to dampen the volatility of the total index. So, the OEX, S&P 500 index, or SPX, and the Nasdaq may not have been that volatile recently, while individual stocks have. "Another reason for these high premium levels may be that investors have become very defensive buying equity puts, as they lost confidence in 1998 in the effectiveness of indexes as hedges," he adds.