Thursday Options Recap

Sentiment

Stocks opened higher on benign economic data and are adding to early gains late Thursday. The major averages opened steady after monthly retail sales data showed a .5 percent increase in May, which was much better than the .2 percent drop the month before and in-line with economist estimates. A separate report showed weekly jobless claims falling by 24,000 to 601,000 last week, which was better than the 10,000 decline economists had predicted.

Rallying commodity prices seemed to help underpin hopes for an economic recovery as well. Crude oil gained another $1.39 to $72.72. Gold battled back from early losses to close up $6.80 to $961.50.

Meanwhile, in contrast to Wednesday, when a poor auction of ten-year Treasury notes sent bonds skidding, bonds rose after a similar auction of thirty-years went well. Yields are easing. The benchmark ten-year Treasury is up 23/32nd and its yield, after reaching the 4 percent "psyche" level yesterday, is now 3.85 percent.

The dip in yields is reassuring some investors and the Dow Jones Industrial Average is up 110 points heading into the final forty-five minutes of trading. The CBOE Volatility Index (.VIX) slipped 1 point to 27.48. Approximately 7.1 million calls along with 5.6 million puts traded on the session.

Bullish Flow

Call volume in Etrade Financial (ETFC) is off the charts! Interest picked up in October 2 calls early today and more recently (around noon), the same Jan 2010 - Jan 2011 call spread trades that surfaced Tuesday re-appeared. In this reverse diagonal spread, the strategist is buying the Jan 2.5s and selling the Jan 2011 calls at the $5 strike, paying 17.5 cents today. The spread traded nearly 50,000 times two days ago and represents a substantial bullish bet on the online-broker: basically looking for a move beyond $2.50 by Jan 2010, but not above $5 through Jan 2011. While there is no specific news today, Flyonthewall notes that DJ reported "on June 9 ETFC is working with its largest shareholder, hedge-fund firm Citadel Investment Group, to shore up its financial position."

US Natural Gas Fund (UNG) is up 83 cents to $14.87 after bearish natural gas data and ongoing strength in crude (+1.55 to 72.88) conspired to send natural gas up 24 cents to $3.95. Action is heating up in the options market as well, with 192K UNG options traded so far and call volume accounting for about 73 percent of the volume. June and July 15 calls are the most actives, with buyers dominating the action and looking for further upside in the natural gas ETF.

Bearish Flow

Bearish traders have Deere (DE) in their headlights Thursday. Shares are down 24 cents to $45.27 and more than 20,200 Sep 40 puts traded. According to one of WhatsTrading's exchange-floor contacts, most of the volume is due to the purchase of a whopping 18,300 contracts for $2.85 per contract, or a $5.2 million dollar investment. The trade also included 700 contracts for $2.80 and 531,000 DE shares at $45.30. The overall delta of the total package is very negative and therefore it looks like a substantial bearish the Deere might be roadkill soon.

Implied Volatility Movers

AMEX (AXP) implied volatility is moving higher amid heavy put volume. 48,000 contracts have traded so far today, compared to 22,000 calls. The increasing demand for premium has implied volatility up to 56, from about 50 the day before.

Implied volatility is also higher in Human Genome Sciences (HGSI), Akamai (AKAM), and Assured Guaranty (AGO). Implied volatility is lower in Home Depot (HD), Vulcan Materials (VMC), and Bank of America (BAC).

Comments

[Mark Roy:]

Although the market moved below 950 today, it is important to remember that the VIX is implying a smidget more than a 1% move in the S&P on a given day, so if the market wants to make another push higher, volatility would actually have to be higher, meaning that a correction would be the best, and perhaps the more likely short-term scenario.
As far as options are concerned, if you believe inflation is an issue, check out the silver ETF (SLV) calls. The Jan. 14's and 19's were bought heavily a week or two ago and that trade accounts for most of the open interest. i believe 75000 14's were bought and 100,000
19's were bought. Also the 13's were sold (75,000). This risk-reversal trade is obviously a way to take advantage of the hyper-inflation play as silver is said by many to outperform gold by far in an inflationary environment

Jun 11 05:43 PM

[Mark Roy:]

Also, I think that the buyers of those UNG calls are dead wrong. Although the ETF exploded on heavy volume, the ETF, along with just about everything else is ridiculously overbought. When traders pile into those calls on a day it's up 5.5%, it probably means its time to be short. would also rather buy XLE calls because nat. gas probably won't explode until Q4 when demand picks up and it's actually needed.

Jun 11 05:49 PM

[Davidpeers:]

I do believe E-Trade will come out of this just fine!! But will need some patience! 5 bucks with-in a year or so would be SWEET!! Personally, I think it's a no brainer, but nothing is for sure these days??? Just my opinion..And I'm sure their will be MUCH better returns on some other stocks, just happen to be partial to ETFC??

Jun 11 10:00 PM

[JR Ewing:]

Hi Fred,

Since you brought up VMC above. What do you make of what looks like a huge PUT premium spread to the calls. The stock has not traded in the low 30's since 2003, the NOV 30 is 1.25 - $15 out of the money.

Jun 27 11:22 AM