Volatility Pickup Despite Revision To IMF Growth Forecast

(^VIX) - CBOE Volatility Index - Despite a pre-market rally for S&P index futures encouraged by a 2010 growth upgrade from the IMF, the market quickly ceded its positive tone and inspired some volatility bidding. Two noteworthy trades stand out. First, the liveliest contract appears to be the July 32.5 call where more than 17,000 contracts changed hands at premiums of about 2.30 each. The Vix is up sharply today at 32.83. This at-the-money call buying suggests a need to protect risks to portfolio rather than wager for a much higher reach by the fear gauge. One likely reason behind today’s move is perhaps a mid-morning surge in the value of the Japanese yen, which has been bubbling under in recent days. Often seen as a safe haven as global economic health deteriorates, a sudden burst of demand today simply put risk aversion front and center. Elsewhere in the November contract it appears that an investor wrote a strangle combination as he sold 11,000 27.5 puts and the same amount of 40 strike call options for a combined premium of 5.25. The strategy is only at risk in the event that come November’s expiration the Vix has strayed outside breakeven parameters of 22.25 and 45.25. A settlement within the range of the strikes chosen today would leave the investor taking the full credit.

(XRT) - SPDR S&P Retail ETF - For the second day in a row it appears that an investor is casting bearish aspersions on the fortunes of retailing stocks, at least through options activity on the SPDR Retail ETF. A put butterfly traded 50,000 times yesterday in the July contract and the identical trade showed up on our market scanners once again Wednesday. The combination centers on the 24 strike price and compares to a current price for the XRT of $26.13. Today’s execution all took place at mid-market prices, yet we doubt that the investor enacting yesterday’s trade quit the field for a two-cent loss so quickly. It’s more likely that either the same or a new investor is adding the same position. The combined premium today is 33 cents compared to yesterday’s 35. The combination involves 50,000 July put options at the 24 strike in conjunction with 25,000 puts at each of the surrounding 22 and 26 strike prices. The premium paid in a long butterfly of a net 33 cent cost to the investor who would make 1.67 in the event that at expiration the share price of the ETF was precisely $24.00 (the central strike price). In the meantime, the retail fund must decline in value to $25.67 before the investor would breakeven.

(GPS) - The Gap, Inc. - Expectations for a revival in retail fortunes later in the summer were played out using options on The Gap. A bullish reversal on the global specialty retailer of clothing and accessories indicates that some investors have decided to ‘mind the gap.’ Shares of the moderately priced clothier have declined slightly today by less than 1% to $14.97. Hoping for a rally by expiration in August, investors sold 4,500 puts short at the August 12.5 strike price for 20 cents per contract in order to finance the purchase of 4,500 calls at the higher August 17.5 strike price for 25 cents apiece. Traders are left with a net cost of one nickel for the transaction and are hoping to see Gap’s shares surge 17% to the breakeven point at $17.55 by expiration. We note that shares of the stock breached $18.50 back on June 1, 2009.

(XLP) - Consumer Staples Select Sector SPDR - The consumer staples ETF caught our eye this morning after we observed one far-term bullish investor purchasing a large chunk of married puts. The price of the underlying shares has risen slightly by less than 0.5% to stand at $23.13. It appears that the trader bought 9,000 put options at the December 24 strike price for a premium of 1.90 per contract. The investor simultaneously bought an equivalent number of shares of the fund for approximately $23.15 each. The investor clearly wants the share price to rally in the staples ETF, but feels the need for training wheels perhaps over worries that the current market correction turns out to provide a bigger buying opportunity. This long stock position is protected by the put options in the event that shares are trading beneath the breakeven point to the downside at $22.10 through the year end. Finally, the investor will begin to amass profits to the upside if shares rise by more than the price paid for the underlying shares plus the premium paid for the protective put options for an effective breakeven point to the upside at $25.05.

(WFC) - Wells Fargo & Co. - Shares of Wells Fargo have surrendered more than 3.5% today to stand at $22.52. The WFC ticker symbol surged to command one of the top spots on our ‘most active by options volume’ market scanner after one fervent bear juggled 155,000 put options around the July and August contracts. This investor was seen rolling 45,000 puts - which he originally bought for 2.40 each - from the in-the-money July 24 strike price for a premium of 1.30 apiece to the August 24 strike where 60,000 put options commanded a purchase price of 2.75 each. The trader then reduced the cost of the transaction by selling 50,000 puts at the August 17.5 strike price for 50 cents apiece. Maximum profits will be realized by the investor if shares decline to $17.50 by expiration next month.

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