CBOE Vix Index (VIX) – Abundant liquidity, a slide in the dollar symptomatic of rising risk appetite or rising earnings expectations for 2010. Take your pick as any of the above could be used to justify the investor optimism in a rally once again teetering on the verge of yet another upside breakout for the S&P 500 index. And as that happens the so-called fear gauge just becomes more and more depressed as the need for insurance arguably diminishes. Yet a brace of options trades today appear to disagree with current expectations of lower volatility ahead. Using December call options an investor paid a mere net four cent premium to establish a ratio call spread that predicts fear will return before mid-December. The investor bought 25,000 calls at the 27.5 strike and sold 50,000 at the 32.5 strike to create a spread that would work if the Vix could find the appetite to rally from its current 20.41 level. In the January contract it appears that an investor wrote 12,000 put options at the 20 strike for 35 cents in the expectation that volatility won’t fall much further than its current value. Some investors will be hoping that such trades are a poor indicator of market direction and instead will be hoping for the proverbial Santa Claus rally starting next week.
iShares Dow Jones U.S. Real Estate Index ETF (IYR) – The real estate exchange-traded fund, which mirrors the performance off the Dow Jones U.S. Real Estate Index, attracted bearish options activity in the March 2010 contract. Shares of the IYR are up 1% to $43.30 just ahead of lunchtime on the east coast. It appears one investor established a plain-vanilla put spread on the fund. The transaction involved the purchase of 10,000 puts at the March 40 strike for an average premium of 2.48 apiece, spread against the sale of the same number of puts at the lower March 38 strike for 1.78 each. The net cost of the bearish play amounts to 70 cents per contract. Perhaps the investor responsible for the spread is protecting the value of a long position in the underlying stock in case the real estate market dips lower in the next four months. If this is the case, downside protection kicks in if shares of the fund decline beneath the breakeven price of $39.30 by expiration in March.
The Gap, Inc. (GPS) – Shares of the clothing retailer are up 1% to $22.29 today, joining a number of retail stocks trending upward ahead of Black Friday. Near-term options activity in the December contract suggests investors expect Gap’s shares to remain at or below the current price through expiration. It appears traders sold approximately 13,000 covered calls at the December 22.5 strike for an average premium of 52 cents apiece. Investors retain the full premium received on the sale if shares remain below $22.50 through expiration. Covered-call selling implies that investors accept the risk that shares of the underlying stock may be called away from them if the call options land in-the-money.
Citrix Systems, Inc. (CTXS) – The software development company appeared on our ‘hot by options volume’ market scanner today due to bullish options activity in the December contract. Citrix’s shares added more than 1% during the trading session to stand at $38.58. Investors expecting continued bullish movement in the price of the underlying picked up near-term call options. Approximately 3,000 calls were coveted at the December 40 strike for an average premium of 69 cents per contract. Investors long the calls accumulate profits if shares of CTXS rise 5% to surpass the breakeven point at $40.69 by expiration. Today’s option volume of 11,232 lots represents roughly 25% of total existing opening interest on the stock of 45,231 contracts.
JPMorgan Chase & Co. (JPM) – A pair of bullish risk reversals on JPMorgan today indicates some traders expect shares to move higher over the next few months. Shares of the financial services firm edged 1% lower to $42.06. The larger of the two transactions was initiated in the December contract. It looks like approximately 12,000 put options were shed at the December 40 strike for an average premium of 49 cents apiece, in order to partially offset the cost of picking up roughly 12,000 calls at the higher December 43 strike for 93 cents premium each. The net cost of the reversal amounts to 44 cents per contract. Shares must rally 3% from the current price before the investor responsible for the trade begins to profit above the breakeven point at $43.44. The second reversal took place in the January 2010 contract, and involved the same strike prices described above. Approximately 6,000 puts were sold at the January 40 strike for 1.30 each, spread against the purchase of 6,000 calls at the January 43 strike for 1.77 apiece. The net cost of the trade is 47 cents per contract and positions the investor to profit above the breakeven price of $43.47. We note that shares of JPM traded as high as $44.35 within the month of November.