http://online.barrons.com/article/SB119101953082243166.html?mod=googlenews_barrons Bulls, Bears and Buffett By STEVEN M. SEARS THE SCENE: DEL FRISCO'S BAR in Manhattan, a favorite traders' haunt. Real Money Portfolio Manager: Uncle Ben cut rates, but why do I feel so blue? Johnny Hedge Fund: Volatile volatility shot your nerves. The market's stable now, and going up. Real Money: You say that 'cause your long/short fund is down for the year. The economic news is bad. The dollar's weak. Consumer spending is questionable, and the housing debacle isn't over. The Fed cut rates to avoid rescuing a big hedge fund -- or even worse, a big investment bank. Johnny: You'll go nuts fighting the Fed. The Bernanke put is bigger than Greenspan's. Real Money: Another rate cut just means we're in even bigger trouble. That's why I'm using the VIX at 17 to re-hedge. Only a fool shorts October volatility. Johnny: You're nuts. You shifted from literally praying for a rate cut to worrying about inflation. I'll get rich fading your negativity and buying upside calls on technology, especially semiconductors. I'm buying calls on the Nasdaq 100, levering up semi-sector out performance. Everyone's getting super long all the semi names, Apple [ticker: AAPL] and Google [GOOG], and we're playing as many indexes and ETFs as we can manage. Can you believe the climb in FXI (iShares FTSE/Xinhua China 25 Index)? Everyone's long FXI calls and cash. [BA_CBOEVOL.gif] Real Money: Momentum chaser! SPX [S&P 500] skew hasn't budged since the 50 bip rate cut. Put implied volatility is still higher than call volatility, and that means the options market is pricing another correction -- not another rate cut. The hedge preserves the edge, and I'm keeping new cash on the sidelines. THIS DIALOGUE MAY BE imaginary, but it sums up a real trading schism in today's options market. On one side: investors who think the Fed's cut pre-empted more bad news. On the other: bears awaiting another drop in stocks. The tug of war isn't likely to resolve until the Federal Reserve eases again and the macroeconomic backdrop, including the dollar's value, looks more solid. Until then, the economic-downside argument will continue to dominate Select Sector Financial SPDR (XLF) put trading. And "hedge and a half" options on the iShares Russell 2000 Index Fund (IWM) -- its beta is 1.54, compared with 1 for the S&P 500 -- will continue to attract call sellers and put buyers who are betting on bullish and bearish outcomes. According to a major specialist firm, options volume in ETFs -- the arena where most hedge funds and portfolio managers are mapping expectations -- indicates a calm market for the next few weeks. After that, who knows? WARREN BUFFETT APPARENTLY has changed his mind about "financial weapons of mass destruction." He's using options to increase his stake in Burlington Northern Santa Fe (BNI), and it's not the first time he's used derivatives. In his 2006 letter to Berkshire Hathaway (BRKA) shareholders, Buffett disclosed he has made pretax profits in the hundreds of millions of dollars trading "wildly mispriced" derivatives, a tool he once famously maligned.