Wednesday Options Recap

Sentiment

Stocks are flat in a day of quiet trading Wednesday. The early earnings news was mixed. While Costco (COST) helped the retail sector with better-than-expected numbers, Yum Brands (YUM) and Monsanto (MON) suffered some post-earnings weakness. Investors now wait for Alcoa (AA) to unofficially kick off the earnings reporting season after the closing bell.

Meanwhile, the economic calendar remains light until weekly jobless claims and wholesale inventories Thursday morning. The next batch of meaningful data doesn't hit until retail sales next Wednesday. (However, same store sales from a number of retailers should grab some attention tomorrow morning.)

Until then, investors don't have a lot of news to work with and the S&P 500 has traded in a narrow 8 point range. With forty-five minutes left to trade, the S&P is flat. The CBOE Volatility Index (.VIX) slipped .90 to 24.80. Trading in the options market is on the light side, with approximately 4.2 million puts and 5.4 million calls traded so far (a ratio of .77, compared to a 22-day average of .77).

Bullish Flow

Visa (V) is up $2.65 to $70.91 and 31K calls traded so far. The volume represents 3X the expected and compares to 7,400 puts. The activity is scattered across a number of contracts, with noteable buying seen in Oct 67.5, Oct 70, and Oct 72.5 calls, while sellers driving some of the flow in Jan10 65 and Nov 75 calls.

Meanwhile, Mastercard (MA) is up $10.66 to $211.26. with call volume (15K) outpacing put activity more than three-to-one. The strength in MA and Visa, along with the heightened call activity, is due to speculation that the House will pass less strict rules on credit card companies than originally feared. Shares of the two companies came under pressure on Sep 25 amid talk of changing "interchange fees" that CC companies impose on retailers.

Bearish Flow

Proshares Ultra Short Basic Materials Fund (SMN) is down 5 cents to $10.81 and one player appears to be looking for a bullish move in the bearish fund — buying the Nov 10 - 13 call spread for $1 on the ISE, 2500X. The exchange-traded fund is designed to move 2X the inverse of the basic materials fund and, by creating this spread, the investor is actually making a bearish bet. The cost is $1 and the potential pay-off is $2 if SMN rallies to $13 or beyond by the November expiration.

Implied Volatility Movers

Chimera Investment Group (CIM), a New York based property management company, is down 3 cents to $3.97 and options volume is running 16X the average daily on increasing interest in March 5 calls. Meanwhile, implied volatility (average) is really moving, up to 78, from about 60 the day before.

Implied volatility is also higher in Sequenom (SQNM), Polycom (PLCM), and ValueClick (VCLK). Meanwhile, implied volatility is lower in Monsanto (MON), Costco (COST), and Yum! Brands (YUM).

Comments

[Band of Ana...:]

A note on CIM mentioned above. It is a real estate investment trust that did 2 equity follow-on offerings in the April-May 2009 timeframe in order to take advantage of the impending liquidity injected in the RMBS market through the government PPIP and other liquidity programs.

CIM has 10% of its assets in legacy securitized loans from the old PHH, and the rest is pretty much evenly split between agency (government guaranteed) and non-agency (private) residential mortgage backed securities. The agencies are levered conservatively while the non-agencies have no leverage outside of an NLY-issued credit line (NLY shares the same manager as CIM and owns around 10% of CIM shares).

The company is delivering on its strategy, with the non-agencies up 10-15% since 2Q based on indices. Proof of their performance is that they increased their dividend to 12 cents per share. With additional capital gains and leverage, they can probably get to 15 cents, which could justify a $5 stock sometime next year (probably that explains the interest in the $5 calls). For now though, the stock is stuck in the $4 range until earnings scheduled for Nov 6.

Oct 20 09:51 AM