Friday Options Update: UUP, VIX, AONE, SWKS

PowerShares DB U.S. Dollar Index Fund (UUP) – Call options continue to be bought again today in this ETF tracking the performance of the U.S. dollar index. We’re coming around to the view that rather than expecting a bullish perspective on the behavior of the dollar, some savvy options traders paid attention to the filing on Tuesday by the fund’s managers who noted that they may have to create more shares in order to meet growing demand. Heavy option activity followed, which may have created further liquidity issues at the fund and caused a short squeeze on Thursday when shares were halted pending this announcement. What is noteworthy is the fact that the UUP veered off in a direction all of its own, surging two percent at a time when the dollar index was practically unchanged. So we’re not quite sure what the buyers of November and December 23 strike calls are doing on the other side of this trade. It’s possible they have a ready made hedging or arbitrage position to offset as many calls as they can. Open interest in the November calls today grew to 310,000 from 40,000 on Monday, while the 20 cent premium today has seen a further 30,000 contracts change hands. The dollar did get a short-lived boost after the rate of unemployment broke the double-digit barrier earlier in the morning. Non-farm payrolls fell by 190,000 in October lifting unemployment to 10.2% - the highest in 26 years. Dollar buying as a safe haven quickly abated as investors came round to realizing that the economic gloom continues to clear.

CBOE Vix index (.VIX)– Equities traded either side of unchanged after nerves were soothed in the wake of the unemployment reading. Yet now that the Dow industrials average has reclaimed 10,000 and the earnings reports at eight-out-of-10 S&P 500 index constituents have beaten estimates, fear has once again slipped. This time last week saw heavy demand for the protection that option premium offers investors but a week later the vix index has slipped back to 24.73. There was contrarian call option buying to be found though. Investors bought 5,000 calls maturing in January at the 27.5 strike and twice as many calls at the 35 strike for what’s shaping up to be a rich 1.35 premium. Elsewhere there appears to be significant put selling at the December 22.5 strike where almost 28,000 lots have traded at 50 cents. Either someone has a strong desire to sit on an attractive 50 cent bid, making room for arbitrage selling or someone is abandoning a long position as the whole volatility trade goes sour.

A123 Systems Inc. (AONE) – Heavy-duty lithium battery manufacturer took a Thursday thumbs-down from CNBC’s Jim Cramer, who in his infinite wisdom proclaimed that the easy money has been made on the stock. As a result today shares are down 3.5% to $17.00. Only two months ago did the company see its stock jump draw a crowd when the IPO saw its capitalization rally by 50% right out of the gate. Option sellers turned up to short call options expiring in December with a 22.5 strike price. By writing calls at the strike for a 45 cent premium, these investors guarantee delivery of stock in the event that the share price recovers by 32% from its current price. It doesn’t appear as though this activity suggests covered call strategies given the pace with which the stock is in decline today.

Skyworks Solutions, Inc. (SWKS) – Shares of the semiconductor maker surged 8.5% today to $11.91 after the firm set a profit target above analysts’ expectations and stated revenue will likely grow in the current quarter. SWKS posted fourth-quarter earnings of 24 cents per share, beating street estimates by 2 pennies, on revenue of $228 million. Bullish options action took place in the January 2010 contract where one investor initiated a call spread. The trader purchased 5,000 calls at the now in-the-money January 10 strike for a premium of 2.00 apiece, spread against the sale of 5,000 calls at the higher January 12.5 strike for 60 cents each. The net cost of the transaction amounts to 1.40 per contract. The trader may pocket maximum potential profits of 1.10 per contract if shares rally up to $12.50 by expiration in January, but the decision to buy in-the-money call options suggest a desire to take ownership at expiration. Option implied volatility contracted 30% following earnings to arrive at the current intraday low of 49%.