Thursday Options Update: VIX, FSLR, HMY & M

CBOE Vix index (VIX) – With the equity market down and the dollar on the rise, investors across different asset classes today appear to be blaming one another for prevailing direction. No one seems to know why anything is moving in the fashion it is. The suggestion of course is that risk appetite is on the demise and fear is picking up. Compounding such indecision in the volatility class are trades suggesting ongoing disparate views on the fortunes for equities going forward. The so-called fear gauge is 5% higher at 24.90 today while trading has been two way. In the November options one investor loaded up on 25,000 call options at a 25 cent premium suggesting that the index will be above 25 when options expire next Tuesday. The December contract equally hinted at more volatility ahead as one traded bought the 27.5/35 call spread 25,000 times at a net 93 cents. In order for this trade to break even next month the Vix index would need to settle above 28.43. Arguing the bullish case another investor bought 15,000 put options at the December 20 strike, which suggests that volatility will subside into year end rally for equities.

First Solar, Inc. (FSLR) – Bullish options activity appeared in the November contract despite the 2.5% decline in shares of the semiconductor company today to $116.98. A bull call spread on FSLR suggests one investor doubts shares will continue much lower. The trader purchased approximately 2,300 calls at the in-the-money November 115 strike for 4.75 each, spread against the sale of roughly the same number of calls at the higher November 120 strike for 2.44 apiece. The net cost of the transaction amounts to 2.31 per contract. Shares must recover through $117.31 in order for the contrarian trader to breakeven by expiration next Friday. Maximum potential profits of 2.69 per share are available to the call spreader if the stock rebounds up to $120.00. We note that FSLR traded as high as $120.14 during yesterday’s trading session.

Harmony Gold Mining Co. Ltd. (HMY) – A tiny tap on the brakes of the gold rush was enough to force some investors to abandon bullish positions on the underground and surface gold mining company today amid the 5% decline in shares to $10.23. Gold prices retreated from a record high earlier today as the dollar rose. Traders originally purchased call options at the out-of-the-money January 12.5 strike to position for continued gains in the stock. Harmony’s shares were trending upward and rallied 16% from $9.59 on November 3, 2009, up to $11.09 on November 9, 2009. However, current declines inspired investors to take whatever reduced premium they could get their hands on. Approximately 19,500 calls were shed at the January 12.5 strike for an average premium of just 33 cents per contract. Investors were paying upwards of 1.00 per contract for the same call options a few days ago. Traders are cutting their losses, salvaging what premium is available in case shares of HMY continue to erode.

Macy’s, Inc. (M) – Shares of the department store operator are recovering slightly from yesterday’s significant decline. The stock is trading 0.25% higher to $17.91. Option activity in the February 2010 contract suggests one investor expects little movement in price and lower volatility on Macy’s through expiration. The trader initiated a sold strangle by selling 4,000 puts at the February 16 strike for 1.09 apiece, and by selling 4,000 calls at the higher February 20 strike for a premium of 1.19 each. The gross premium enjoyed on the sale amounts to 2.28 per contract. The investor retains the full 2.28 premium as long as shares remain ‘strangled’ within the strike prices described through expiration. The risk to the trade is a rally above $22.28 in shares of Macy’s or a decline beneath $12.72. In either case option related losses would mount penny-for-penny.