Tuesday, August 16, 2011

Hot Option Plays: Market Vertigo

Volatility is the name of the game. Buying protection is hard to do at this stage which is why I suggested the stock replacement with LEAPS. Also a 43 volatility in the VIX tells me that the market has very little conviction of direction. This also increases the uneasiness of further capitulation, “puking”. I have to speak tonight at The Money Show in San Francisco so I have to run. See you Midday.
Market volatility remains extreme at home and abroad. The table was set for morning weakness on Wall Street after stock indexes plunged across the Eurozone amid concerns about French banking problems. France’s CAC 40, Germany’s DAX, and Spain’s IBEX all lost more than 5 percent. The concern is that problems in the banking industry could spread along with the European Debt Crisis. There was also some talk that France could lose its triple A credit rating, although Moody’s and S&P have so far stood by their ratings. Nevertheless, debt fears are weighing heavily on equity markets globally, which were already on edge after Standard & Poor’s cut the US credit rating late-Friday. The Dow Jones Industrial Average lost 635 points when markets resumed trading Monday and, although it recaptured 430-points yesterday, the industrial average fell sharply along with European stock benchmarks today. At the closing bell, the Dow Jones Industrial Average had lost 520 points. The tech-heavy NASDAQ gave up 101.5.
Sandisk (NASDAQ:SNDK) options were heavily traded Wednesday. Shares of the data storage device maker lost $1.42 to $36.51. Total options volume was 22,000 calls and 64,000 puts. The top trades were spread trades after investor sold the September 37 – 41 put spreads at $2.35, 5000X. The same spread traded 20,000X on the day and was likely closing trades. 15,000 were apparently opened on August 1 when shares were around $42. At that time, 10,000 were bought at $1.34 and 5,000 at $1.25. Shares are down more than 12 percent since that time and both the 37s and 41s are in-the-money. If shares hold below $37 through the September expiration, the spread would widen to $4 (difference between the strike price). However, today’s strategist is probably liquidating the position now because the stock has dipped below $37 and their target has been reached. That is, they are closing out the position now rather than run the risk of seeing SanDisk reverse direction and recapture some of its recent losses.
Bullish trading was also seen in Staples (NASDAQ:SPLS), CREE and Marvel Technology (NASDAQ:MRVL).
Options on Banco Santander (NYSE:STD), a Spanish money center bank, were heavily traded today. Shares lost 87 cents to $8.31 amid concerns about European bank exposure to debt during the deepening debt crisis. Shares have lost 27 percent in less than three weeks and touched new 52-week lows today. Meanwhile, about 20,000 puts and 4,700 calls traded in STD today. September 9 puts, which are 7.7 percent in-the-money and expire in 37 days, were the most actives. 7,377 changed hands. August 6 puts, August 8 puts, September 6 puts, December 8 puts and December 10 puts were busy as well. The December 8 was the most active call option on Santander. Meanwhile, average implied vols in STD options surged 39 percent and is elevated at 110, as players in the options market appear to be bracing for additional volatility in shares of the bank in the months ahead.
Bearish flow also surfaced in UBS, Cemex (NYSE:CX), and Paychex (NASDAQ:PAYX).
Index Trading
Trading in the index market remains vibrant, as the surge in market volatility has triggered strong investor demand for puts and calls on the stock benchmarks. About 1.2 million puts and 870,000 calls traded across the S&P 500 Index (.SPX), NASDAQ 100 Index (.NDX) and other cash index products today. SPX finished the day down 51.77 to 1,210.76 and SPX August 1150 puts and calls were the most actives, with 69,633 and 50,082 traded, respectively. Meanwhile, CBOE Volatility Index (.VIX), which ran to 15-month highs of 48 Monday, gained 7.93 to 42.99. Trading in VIX options remains busy as well, with another 312,000 calls and 301,000 puts traded on the product today. The extreme levels of volatility this week and large price swings in the market averages has created a lot of uncertainty. It’s a jittery market where investors are scrambling for options on volatility and index products to hedge short-term risk.
ETF Action
The top options trades today were in the iShares Emerging Markets Fund (EEM). Shares lost $2.19 to $39.13 and a 76,000-contract block of September 39 puts traded at the $1.96 asking price. At the same time, 76,000 September 36 puts traded on the $1.11 bid. The two trades have the characteristics of a Sep 36 – 39 put spread for a net debit of 85 cents. The massive premium purchase is probably a play on the uptick in recent volatility across global financial markets. After big losses across the Eurozone and on Wall Street today, emerging markets will likely come under pressure when stocks resume trading overnight Thursday. Excluding commissions, the spread offers a potential $2.15 payout if EEM shares fall to $36 through the September expiration, which represents an 8 percent decline over the next 37 days.

No comments: