Hot Option Plays: Look At Volatility

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Cusick’s Corner 03-09-2012
Nice grind into the close but nothing really materialized, except the fact that front month volatility, VIX, is running at a level about 3-5 points below the back months, and June VIX futures (VXM12 on the optionsXpress site) are at 25.53. This is concerning because this market seems to be a lot more complacent than the volatility that is being reflected in the back months. This means one of two things, that the back month volatility is too expensive and could converge on front month or that this current complacency in the market could potentially shift. Next week is “Quad” Witching Expiration which is when stock index futures, stock index options, stock options and single stock futures all expire in the same week, which could lead to some volatility early in the week as many market participants may reposition. Shore up your trade plans for next week and have a great weekend.

Stock market averages finished higher with help from jobs data. The Labor Department reported Friday morning that the US economy added 227,000 jobs during the month of February. Economists were expecting an increase of 206,000. As expected, the unemployment rate held steady at 8.3 percent. The headline payroll number helped send stock index futures modestly higher and seemed to overshadow a separate report, which showed the nation’s trade deficit widening to three-year high of $52.6 billion in April. Meanwhile, stock market averages finished mixed in slow trading across the Eurozone after final numbers from a Greek debt swap were released. The news didn’t hold any surprises, but the euro fell sharply against the buck – now off 1.15 percent to 1.312 on the dollar. Yet, some investors seemed to breathe a collective sigh of relief that the day’s news wasn’t worse. At the end of the day, the Dow Jones Industrial Average had traded in a narrow 62-point range and added 14 points. The tech-heavy NASDAQ gained 18 points.

Bullish
Silver Corp Metals (SVM), a Vancouver-based mining company, finished the day up 23 cents to $7.25 after silver erased early losses and added 39 cents to $34.22. SVM had been falling along with the white metal in recent weeks and is down 12 percent since January. Meanwhile, options on the stock were actively traded Friday. 7,340 calls and 1,380 puts traded in the name today. The top trade of the day was a 1,500-contract block of April 6 calls for $1.35 on the International Securities Exchange. Data from the ISE indicate an investor bought the block to open. 3,045 contracts traded total. April 8 calls were the most actives in SVM after 3,310 changed hands. Some investors were possibly taking positions in in-the-money and out-of-the-money calls on SVM on hopes the stock might follow the metal higher in the weeks ahead.

Bullish trading was also seen in Smith and Wesson (NASDAQ:SWHC), Michael Kors (KORS), and AIG.

Bearish
DR Horton (NYSE:DHI) has seen two days of wild options action. 9,300 calls and 93,000 puts traded on the homebuilder Thursday, a ratio of ten-to-one, and the activity created 46,830 contracts in new open interest in the April 14 put options in DHI. Shares rallied early today and finished up 91 cents to $15.47 on heavy volume of more than 20 million shares after a brokerage upgraded the stock to Outperform from Neutral. DHI has now rallied 14.9 percent in three days and running to 52-week highs. Still, put buyers were active in the name Friday. The focus was again on April 14 puts, which are falling 9.5 percent out-of-the-money with six weeks of life remaining. 29,200 traded and, while some investors might have been liquidating positions opened yesterday, data from the ISE indicate that investors were probably also opening new positions in the contract. It’s not clear what is driving the very high volume in DHI downside puts, but it seems to reflect skepticism that the recent rally in the shares will hold through mid-April.

Bearish trading was also seen in Tibco Software (NASDAQ:TIBX), FTI Consulting (NYSE:FCN), and Intermune (NASDAQ:ITMN).

Index Trading
CBOE Volatility Index (.VIX) lost .86 to 17.09 and is on a three-day 18.1 percent losing skid. The market’s “fear gauge” has now wiped out the gain from Tuesday, when the indicator jumped 2.92 points to 20.97 and the S&P 500 sank 21 points to suffer its biggest loss of the year. The S&P has erased that loss and, in fact, finished the week with a modest two-point gain. Meanwhile, April 19 puts on the volatility index saw interest for a second day. As noted in yesterday’s closing report, one investor bought 16,000 VIX April 19 puts for 77.5 cents per contract Thursday. Open interest data indicate a new position was opened. Today, another 28,000 contracts were bought in morning trading for 90 cents. The two days of buying in April 19 puts is probably a view that the volatility index will continue drifting lower and the index will settle well below 19 at the April expiration. (Note that VIX options are based on forward values of the index and not the actual VIX. For that reason, the premiums don’t necessarily reflect the changes and values of the spot index.)

ETF Action
SPDR 500 Trust (SPY) added 53 cents to $137.57 and a 79,000-contact block of March Quarterly 145 calls traded on the exchange-traded fund for 7 cents when the market was 6 to 7 cents. The day before, 65,000 March Quarterly 144 calls were bought on the fund for 5 cents per contract. Although the SPY was little changed Friday, the market on those calls is now 8 to 9 cents. It appears that implied volatility might be lifting in these deep out-of-the-money calls on the SPY. Quarterly options are options that expire at the end of each calendar quarter (Mar, Jun, Sep, Dec) and are listed on some of the more popular underlying securities like SPY, QQQ, and SPX. The front-month Quarterly March options expire at the end this month. Buying out-of-the-money Quarterly calls is typically a view that the market (S&P 500) will perform well through the remainder of the quarter.

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