July 12, 2011, 5:28 p.m. EDT
Options trades suggest tech stocks down, not out
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By Brendan Conway
(Updates with closing stock prices throughout, adds late-session Irish debt downgrade and VIX move in the second paragraph, and adds context in the third.)
-- Irish debt downgrade sends volatility index higher late in session
-- Technology sector sees more bullish trading
-- Tech options trades contrast with stocks' weakness
NEW YORK (MarketWatch) -- Sovereign-debt worries continued to grip markets Tuesday, although bullish options traders were emboldened on individual stocks, including in the battered technology sector.
The CBOE Volatility Index, or VIX, rose 1.48, or 8.1%, to 19.87 Tuesday, staging a late-session jump that followed a downgrade of Ireland's debt by Moody's Investors Service. Markets have been wracked by fears that Europe's sovereign-debt crisis is extending into Italy, a country that could pose bigger risks than smaller nations like Greece.
The move was less pronounced than Monday's, when the so-called "fear gauge" jumped 15%. The measure is still slightly below its long-term average. Its level signals that most traders have kept their cool, refusing to pay high premiums for the Standard & Poor's 500 index options that drive the VIX.
Across the market, options trading leaned more heavily to bullish options than normal, a sharp reversal from Monday's action, when bearish contracts predominated.
Among the single-stock options that saw notable bullish positioning Tuesday were Microchip Technology Inc. /quotes/zigman/53421/quotes/nls/mchp MCHP -0.36% , Cree Inc. /quotes/zigman/53629/quotes/nls/cree CREE +0.22% and ON Semiconductor Corp. /quotes/zigman/84036/quotes/nls/onnn ONNN -0.43% . The technology sector traded sharply lower as a handful of companies issued weak guidance and warnings on future earnings. Tech is the second-worst-performing sector in the Standard & Poor's 500 index over the last three months.
Chandler, Ariz.-based chip-maker Microchip Technology's stock fell as much as 14% after the company provided weak guidance after Monday's close. The company said it saw "broad-based weakness" in the June quarter owing to lower automotive production, plus softness in consumer spending.
But options traders Tuesday bet on a reversal as calls conveying the right buy Microchip's shares by the middle of October were highly active. At a price of 60 cents, the calls grant the right to buy shares at $36, and profit if the stock surpasses $36.60. Microchip's stock finished down 4.55, or 12%, at $32.93.
"These options will need the stock to recoup a majority of [today's] loss" to make any profits, said Patrick Mortimer, director of options trading at Pipeline Trading Systems LLC, in a report.
Cree's stock set a fresh 52-week low Tuesday as the technology sector traded lower. But the stock moved higher later in the session. The options market saw investor activity in bullish options that suggested a view for shares to advance by the middle of September.
The move, which entails two sets of bullish options, works best if the stock rises to $37.50. Cree's shares ended 7 cents higher, or 0.2%, at $31.32.
Phoenix, Ariz.-based ON Semiconductor's August call options traded actively. At a price of 10 cents, the company's $11 August call options profit if the stock surmounts $11.10 by the middle of next month. Shares lost 90 cents, or 8.9%, to finish at $9.22, following others in the sector lower.
Some options strategists stayed cautious about the market's prospects. "I still don't think that the damage
