Option Investors Appear to Keep Their Fears in Check for Now
NEW YORK -- Federal Reserve policy makers voted to keep short-term interest rates unchanged, choosing to do little now to alleviate the increasingly bearish sentiments in the option market.</br></br>Option investors have adopted a more defensive posture, but traders say they have yet to see the kind of acute fear that contrarians say marks stock-market bottoms. The option market's fear gauge, the Chicago Board Options Exchange's market volatility index, or VIX, edged up 0.67 point to 45.38, but remains far shy of its intraday peak of 56.74 on July 24. Meanwhile, major stock indexes are hovering near their late-July lows.</br></br>In the heavily traded options on the Standard & Poor's 500-stock Index, for instance, investors are more willing to pay up for downside protection than for bullish upside bets, traders said. They also have noticed a skew between the implied volatility of just out-of-the-money puts compared with comparable calls.</br></br>"The slope of the implied volatility skew, which measures the extra premium investors are willing to pay for out-of-the-money puts relative to out-of-the-money calls, has likewise increased" and is near its one-year high, Edward Tom, a Credit Suisse First Boston strategist, said in a report. Investors looking to increase their exposure to stocks might consider option plays like "risk reversals" -- or selling puts and buying calls on the same stock or index -- to take advantage of this skew in premiums, rather than buying stocks outright, he said.</br></br>International Business Machines' puts traded briskly as its stock slipped to another 52-week low following the downgrade of competitor Electronic Data Systems. One analyst also warned that declining returns on IBM's pension-plan assets can cut into the company's cash if the markets don't improve, while raising questions about whether Big Blue can meet year-end earnings estimates.