Tuesday's Options Report: Sara Lee, Lockheed Martin, Fortune Brands, Apple, US Bancorp, EMC

With the Dow industrials forming a diamond pattern over the past eight trading sessions, there are no prizes awarded for interpreting that either a continuation or reversal is imminent! However, this uncertainty does explain the increased demand for protection through the CBOE VIX index, which is once again on the rise again today as stocks slide out of the gate. The dollar meanwhile has begun a bungee jump and is lower across the board today. The single European currency traded at a fresh high against the greenback earlier – above $1.3850. There’s little respite from government note yields, where yields won’t ease to bail investors out.

VIX - The CBOE VIX index [VIX] rose 6.9 percent this morning to 17.97 as call demand remained firm in the August series at the 15 strike where investors bought 3,700 lots at around 3.0. The delta, or likelihood that these calls will end in-the-money at expiration is 86 percent. However, the rising premium implies a higher break even point. In this case adding the 3 point premium to the 15 strike price gives a value of 18. The delta at the 18 strike, which is at-the-money, is 52 percent. Glancing back over our shoulder tells us that as recently as two weeks ago those same 15 calls could have been bought for 1.6.

For the first time in a while, the balance of puts and calls seems a little less one-sided today with August 14, 15 and 16 puts finding buyers totaling 4,300 lots ahead of noon. The November 14 strike also saw 2,000 lots trade at a price of 0.45. So that trend we noted yesterday that traders are stocking up in fear of near-term calamities and looking to the Fall for calmer seas, continues to play out today.

SLE - Consumer brands giant Sara Lee (SLE), which in addition to its eponymous line of retail bakery and dessert lines owns brands including Jimmy Dean, Hillshire Farms, Ball Park and Sanex, is seeing a big pickup in volume and implied volatility positioning this morning. Today’s actively traded volume, which already exceeds 11,700 option contracts, is equivalent to more than 24 percent of its total open option interest, and is about six times the normal level for this ticker. Implied volatility has also shot sharply higher, up 41 percent to nearly 27 percent – a significant elevation from the 14.5 percent volatility shown historically in Sara Lee share prices, and evidenced by the elevated premiums seen in both calls and puts. More than 6,000 contracts have traded at the August 17.50 call strike against existing open interest, at premiums priced a nickel or 25 percent higher than yesterday. Volume on the put side has been negligible. Sara Lee shares are down .82 percent this morning at $16.89.

LMT - Bumper earnings from defense contractor Lockheed Martin (LMT) have been rewarded by the market in kind, with a 6.88 percent gain in early trading at $106.40, a new 52-week high. The current circulating volume of 16,800 contracts is equivalent to nearly a third of its total open interest. Four and a half times as many calls are trading as puts. This morning’s price run has led to a 400 percent spike in call side premiums in the August 110 call strike. Volume elsewhere has concentrated on the September series, 110 call strike, where more than 5,000 lots have traded.

FO - Fortune Brands (FO), the consumer brands outfit whose heterogeneous activities include everything from homebuilding and home improvement products such as MasterLock locks, golf products, and wine and spirits including Jim Beam whiskey, has flicked both our relative volume and implied volatility indicators today. This morning’s 2,600 active contracts represent 8 times the average daily traffic. Implied volatility is also up about 19.75 percent overnight, currently standing at 25 percent. With shares trading half a point higher at $82.32, activity is centered on the call side, in the August 85 calls, where 1,858 contracts have traded on premiums up 90 percent from yesterday.

In index news, the Dow Industrial Average shed 0.67 percent this morning to 13,852.60. The S&P 500 dropped 0.78 percent to 1529.49. The Nasdaq composite index was also lower this afternoon losing 0.75 percentage to 2670.35.

AAPL – Earnings at iPhone-maker Apple Corp (AAPL) are due on Wednesday, but lost ground earlier today in response to AT&T’s (T) earnings news. Two-day sales of iPhone, which have to be activated at AT&T stores, totaled 146,000 rather than the 200,000 analysts’ estimate for the final two days of the quarter. So having traded at a record high at $144.18 Friday, shares in Apple dropped 2.7 percent by lunch. Scanning options volumes, although call buying outpaces put buying by more than two-for-one, the balance of strikes traded indicates some protective action against disappointing earnings due tomorrow.

Still there are some bullish positions being implemented into the numbers too. Notably the 170 and 200 strikes in both August and October seem pretty optimistic and indicative of the type of reaction that investors have come to expect from Apple’s management when they wow the crowd with stark new revelations. So what to expect over the next week or so from them? Perhaps some announcement that the iPhone has a less expensive sibling that would counter the competition from Blackberry? That would be a crowd pleaser. Or how about a new stand-alone network for Apple that would circumvent problems associated with traction woes at AT&T? Time will tell.

USB - US Bancorp options moved heavily this morning, with more than 31,000 contracts in play before noon. With US Bancorp shares trading about a percentage point lower at $31.38, twice as many puts are moving as calls. Given the proportion of lots moved at each of the strike prices, we observed what looked like ratio call spread activity in the September series at the 32.5 and 35 strikes. Elsewhere, the volume on US Bancorp options appears biased toward the put side. More than 10,000 put contracts traded at the December 30.0 strike. The January 30.0 and 32.0 put strikes were also well trafficked, with a combined total of 10,000 lots moved at these two strike levels.

EMC - More than 68,500 option contracts have traded in the name of EMC Corp/Mass (EMC) today, after the data storage equipment maker reported higher Q2 earnings, but failed to upscale its year-end earnings guidance. EMC shares are down just over a percentage point at $19.29, and this morning’s options volume has seen two and a half times as many calls in play as puts. Heavy activity has been seen at the August 19.0 straddle, as well as at the August 20.0 calls, where 14,600 lots traded. Further ahead, nearly 11,500 lots have traded at the October 20.0 call strike on premiums down more than 8 percent from yesterday.

XHB – Talk about construction traffic! The SPDR S&P Homebuilders ETF has seen options volume equivalent to around 17 percent of open interest trade today with a distinct skew to the downside. Pre-market traders were slamming the sector further and that’s being born out today by around 30 puts trading per call. Of interest, in the December series and with shares in the fund trading at $28.53 (down 1.9 percent) it looks as though investors expect still lower prices for builders. The 25 strike has traded about twice as much volume as the 30 strike. The 30 strike cost 2.05 while the 25 strike is 1.10 in today’s session.

While the subprime woes have been abundantly documented over the last several months, it’s only now that the affair is coming to a head. Fresh bearish comments from analysts have surfaced in recent days. Along with the fact that mortgage lender, Countrywide Financial (CFC), today warned investors to postpone expectations of a housing market recovery until perhaps 2009, these events have conspired to weigh heavily on homebuilder and financial issues.

In the past six months the XLF Homebuilder ETF has shed one-third of its value. A break through the $29.00 low set in early July was breached Monday and that appears to be the straw that broke the camel’s back. As such, fresh share price weakness seems to be inspiring a rejuvenation of bear plays via options. In order to reach the 25 strike by December, shares would need to decline by a further 11 percent. That’s hardly a tall order.

XLY – The Consumer Discretionary Select SPDR ETF is trading 0.6 percent lower today at $39.32. On the options front all of the trading has centered on the September puts at the 39 strike where 10,200 lots have traded at 0.95 premium. With implied volatility standing at 17.8 percent, that’s twice the level seen on the share price. The series only has 88,000 open interest, which indicates a sizeable position today.