Unusual Options Activity Review for Thursday, November 8, 2012
Thursday’s Bullish Trading
US Bancorp (USB) lost 22 cents to $32.17 and options volume on the bank was 4.5X the daily average Thursday, with help from a substantial November – December put spread. In this strategy, the investor bought 14,300 November 34 puts on USB for $1.25 per contract and sold 14,300 December 34 puts on the stock at $1.54. A source on the exchange floor confirms that the USB Nov-Dec 34 put spread was sold at 29 cents, 14300X. Looking at trade history and open interest, it seems probable that the activity was rolling. That is, the investor was short the Nov 34 puts on USB and the contract is now in-the-money heading into next week’s expiration. Rather than deal with the risk of assignment as the expiration approaches, they are covering the position through an offsetting purchase (buy-to-close). Additionally, a new position is being sold-to-open in USB Dec 34 puts. Assignment of the Dec 34 puts is less probable at this point in time because there is greater time value remaining in the contract and it is typically not ideal for an option owner to exercise a contract with significant time value. Moreover, the strategist is possibly looking for the stock to reclaim $34 by the December expiration and is therefore expressing confidence in the stock by writing those in-the-money puts. If the stock climbs above $34 by the expiration, the put is out-of-the-money and expires worthless. There is no reason for an investor to “put” the stock at $34 (strike price) per share right now when it fetches more in the market. The stock was notching new 52-week highs of more than $35 in early-October.
Bullish trading was also seen in International GameTech (IGT), James River Coal (JRCC), and Crocs (CROX).
Thursday’s Bearish Trading
The largest equity options trades across the entire market Thursday surfaced in Bank of America (BAC). The stock added 16 cents to $9.39 after sliding 7.1 percent during Wednesday’s volatile trading session. In options action Thursday, an investor bought a hefty block of 30,000 February 9 puts on BAC for 50 cents per contract and sold 40,000 February 7 puts at 10 cents per contract. The 3X4 put ratio spread appears to be a new position (because volume exceeds open interest in both contracts) and, if so, a bearish play on BAC that offers its best payout if shares are trading for $7 per share at the February 2013. At that point, the 9 puts, which were bought, are worth $2 and the $7 puts, that are sold, expire worthless. A shareholder with a large position in BAC might have initiated the spread to help hedge a stock position heading into 2013.
Bearish trading was also seen in Analog Devices (ADI), Mead Johnson (MJN), and General Mills (GIS).
Options activity is picking up in the index market amid increasing levels of market volatility. 746,000 calls and 918,000 puts traded across the S& P 500 Index (.SPX), CBOE Volatility Index (.VIX), and other cash index products Thursday, which is about 1.25X the average daily levels, according to Trade Alert data. SPX lost 17.02 to 1,377.51 and has dropped 3.6 percent in just two days. December 1300 and 1325 puts were the most actives in the SPX pit. Meanwhile, VIX, which tracks the expected volatility of S&P 500 options, eased .59 to 18.49 despite the market’s slide. The volatility index typically ticks higher when the S&P 500 dips lower. However, VIX was up 8.5 percent to multi-month highs of 19.08 Wednesday. So, Thursday’s dip might be a bit technical in nature. Interestingly, volumes were light in the VIX pit, with about 226,000 calls and 91,000 puts traded on the day. November 18 puts and 20 calls were the most actives.
Analyzing the ETF Market
iShares Emerging Markets Fund (EEM) was down 52 cents to $40.92 Thursday and implied volatility in the options on the ETF moved up amid increasing put activity in the ETF Thursday. About 378,000 puts and 146,000 calls traded on EEM. The top trade was a 104,000-contract block of Nov 40.5 puts for 38 cents per contract. While the trade hit on the bid-side of the bid-ask spread, a source on the exchange floor reports that a buyer initiated the trade. If so, it seems to be a bearish play, or possibly hedge, on the emerging markets. More than 130,000 of these downside puts traded. Meanwhile, implied volatility in EEM options, as measured by the VXEEM Index, rose 1.38 points to 24.95.
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