Wednesday Options Recap

Sentiment

Stocks are trading broadly higher late Wednesday after the Federal Reserve concluded its latest meeting on monetary policy and the post-meeting statement didn't include any unpleasant surprises. Instead, the Fed kept rates unchanged, as expected, and noted some signs of improvement in economic activity.

The major averages traded in a narrow range ahead of the news, as there wasn't much new information to guide the market in morning trading. Some of the energy-related names came under fire after weekly inventory data sent crude oil sliding back towards $69 a barrel.

Beyond that, trading was mostly mixed and the major averages are holding modest gains heading into the final hour. The Dow Jones Industrial Average is up 35 points and the NASDAQ has added 10. Trading in the options market is running on the light side, with approximately 4.7 million puts and 6.2 million calls traded so far (a ratio of .76, compared to a 22-day average of .77).

Bullish Flow

Ace Ltd (ACE) gained $1.27 to $50.73 and 3252 Oct 50 calls traded — 93 percent hit ask-side and open interest is 473. The top trade of the day is 1,949 at the offer for $1.65 on ISE, which is an opening customer buyer. No headlines on the insurance company today (but note that TRV is seeing bullish flow as well).

Traveler's (TRV) is up 66 cents to $48.25 and some investors appear to be looking for additional upside in Jan10 $50 calls. 3,313 contracts traded and 94 percent hit ask-side. Nov 50, Oct 50, and Jan10 60 calls are seeing interest as well. About half of today's volume in TRV has traded on the ISE and ISEE sentiment data indicate that 95 percent of today's calls (3,478 contracts) are opening customer call buyers. No headlines to explain the bullish flow. Implied volatility is 29.4 (+.3), compared to a 52-week high and low of 108 and 27.5.

Bearish Flow

Avon Products (AVP) is up $1 to $33.50 and options volume is running 3X the average daily on increasing interest in Nov 32 puts. 3,186 traded, including a block of 1,523 at the offer for $1.45 on the ISE, which is an opening customer buyer, according to sentiment data. A similar block (1431) traded at the same time on CBOE.

Implied Volatility Movers

The CBOE Volatility Index (.VIX) is sliding, down .62 to 22.46. At these levels, VIX is below its September 11 lows around 22.48. The decline in the volatility might be surprising given that the historically volatile month of October looms. However, one reason VIX is falling is that actual levels of volatility are very low. The 20-day statistical volatility of the S&P 500 (SPX) is only 13.3 percent. Since VIX measures expected SPX volatility, it is under pressure due to the fact that the market simply hasn't been moving much. Real or actual volatility is very low.

Implied volatility is also lower in General Mills (GIS), MBIA (MBI), and Ambac (ABK). Implied volatility is higher in Electronic Arts (ERTS), Ford Motor (F), and Pool Corp. (POOL).