Wednesday, August 29, 2012

VIX Drops to a Learners Permit in Options

Your daily options trading wrap up.

Frederic Ruffy is busy today so we asked Joe Cusick, senior vice president and options analyst with Options Express, to provide a brief on today�s trading activity.

Cusick�s Commentary - RISK ON — trading in a growthflationary (growth & inflationary atmosphere) market is really on! This market clearly had more pent up demand than expected. The headlines in the last two sessions were what most market watchers thought would bring this rally to its knees but then in rode earnings, thanks INTC, and positive EU debt auctions in Portugal and Spain (THE P & S in PIIGS), where the Spanish auction was the more impressive. This was more than enough a catalyst to get the overnight and early morning markets right where we left them two weeks ago, ready to challenge their highs. This rally has some legs with earnings power behind it.

A busy day but one trade that stood out for Cusick was a spread in the iShares Barclays 20+ Year Treasury Bond (NYSE: TLT). The ETF is designed to correspond with the price and yield of a 20 Year US Treasury bond. TLT closed at 92.68, down .60.

Customer traded 50,000 contracts on each side of a three-way, multi-month spread, selling the TLT June 101 Calls, buying the TLT Sep 98 Calls and selling the TLT Sep 101 Calls.

�The trader collected premium of 14 cents for the June calls, and, net-net, paid 32 cents for a spread that may be worth $2.68 by September,� said Cusick. The trader believes TLT �should be static before June expiration but see some moves higher by September.�

Market Sentiment

Stocks were broadly higher following a round of mostly upbeat corporate earnings reports. Intel (NASDAQ: INTC) led stocks higher after upbeat earnings report late Tuesday. Freeport-McMoran (NYSE:FCX), Wynn Resorts (NASDAQ: WYNN), and United Technologies (NYSE: UTX) are among the others rallying around earnings. Economic news included a report on Existing Homes Sales that showed an increase to an annual rate of 5.1 million in March, from 4.92 million in February and better than the 5 million that economists were expecting. Gold closed just under $1500. The Dow Jones Industrial Average added 194 points and the tech-heavy NASDAQ gained 57. The CBOE Volatility Index (CBOE: VIX) is down .67 to 15.16. Overall options volume was high.

Bullish Flow

Dow component Verizon (NYSE: VZ) sees an interesting trade ahead of earnings. Investor sold 10,000 VZ January 32 Puts at $1.18 to buy 10,000 VZ January 42 Calls at 85 cents. Collected 32 cents on this bullish risk-reversal and, since volume exceeds open interest in both contracts, this looks like a new position. It’s not a straight bullish bet, however, as it was tied to 492,000 VZ shares. VZ reports earnings tomorrow before the market opening.

Natural gas producer Williams Companies (NYSE: WMB) sees massive spread trade. Shares are up after natural gas gained 6 cents to $4.33. Prices have rallied 7.2% since April 8. An investor apparently sold 35,000 WMB May 17 Calls at $14.40 and bought 35,000 WMB January 22.5 Calls at $9.35. They paid $5.05 for the spread and are possibly rolling a position out a few months and up a few strikes. WMB shares have risen 54 percent since late-October.

Bearish Flow

Put volume is picking up in the SPDR S&P 500 ETF (NYSE: SPY) despite the equity market rally today. Options volume in the exchange-traded fund through midday is 971,000 puts and 478,000 calls. SPY APR Weekly 132 Puts, which expire at the end of the week and stop trading after tomorrow (Friday is a holiday), was active. One top trade is a spread, in which the investor apparently bought 20,000 SPY May 132 Puts at $1.55 and sold 20,000 SPY May 130 Puts at $1.04. If so, 51 cents was paid for the spread and the investor might be looking for SPY to give up today’s gains and fall back to $130 or less through the May expiration (in 30 days). SPY closed at $133.10 today.

Implied Volatility Mover

The VIX plummeted to its lowest levels since July 2007 today. The market’s “fear gauge” hit a morning low of 14.30 and closed at 15.16. VIX options expire today and the settlement value is 14.86, which means that any April call option with a strike price greater than 15 is expiring worthless. As of yesterday, strikes ranged from 10 to 80, with substantial open interest in the April 23, 25 and 30 calls.

Unusual Volume � (at midday)

Intel (NASDAQ: INTC) options volume is running two and a half times its daily average, with 121,000 contracts traded and call volume accounting for about 65% of trades.

TiVo (NASDAQ: TIVO) options volume is eight times its average daily, with 245,000 contracts traded and call volume representing for 76% of the activity.

IShares Long-term Bond Fund (NYSE: TLT) options volume is running five times its daily� average, with 161,000 contracts traded and call volume accounting for 97% of the activity.

Increasing options activity is also being seen in Qualcomm (NASDAQ: QCOM), Johnson & Johnson (NYSE:JNJ), and IBM (NYSE:IBM).

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