Thursday's Options Report: VIX, Starbucks, Oil Service Holders, Invitrogen, Pozen, Homebuilders ETF, Sohu, Financial Sector ETF

by: Interactive Brokers

VIX – The CBOE Volatility index has retreated from Wednesday's peak of 26.22 as investors braced for 'peak-selling.' Although a sense of calm returned as the Dow rang up a 1.1% gain to close the session, the VIX remains notably elevated and is now set to close above a value of 20 for the sixth straight session. More than half of today's 50,000 volume was lodged in calls at the August 25 strike where some 28,675 contracts changed hands by 11:15am between prices of 1.15 and 1.40. Judging by the fact that the VIX is lower by 5% today while index values are mixed makes it hard to tell whether investors are stepping back or adding new positions.

By 11:30 the Dow Jones industrial average was 0.25% higher at 13,396.30. The S&P 500 index fell by 0.03% to 1,465.30, while the Nasdaq composite index added just 0.26 per cent to 2,560.57.

SBUX - Starbucks bulls continue to graze on call options on the stock following Wednesday's earnings release. Options volume of 61,000 contracts stands out Thursday morning in a relatively quiet morning for options trading. Shares in the world's largest coffee-chain are a little lower at $27.15 and that compares to a short-covering spike at $28.50 about one week ago. Bulls might have been encouraged by the fact that price action filled a price gap on the chart down to $26.54 on Monday. Options traders have bought almost twice as many calls today as puts affirming a perceived positive outlook for the company.

Investors have to weigh the balance of events following an announced 20% rise in revenues and record store openings for the chain against the admission of rising dairy costs and the clear evidence of lower priced competition notably from rivals such as McDonalds. Arguably, failure to deliver new strategic initiatives to combat such competition could result in a decision to lower in-store prices, which investors wouldn't welcome.

Today it was the 30 strike that piqued investor interest in several months, with January taking top volume price with 10,800 lots trading in the morning. The October strike traded 4,200 contracts, which was twice the volume at the same place in the September series. High volume was registered also at the money in August with more than 9,000 calls trading at the 27.5 strike at premiums between 1.0 and 0.5 implying breakeven into expiration of as much as $28.00. Traders see a 43% chance of that happening just now.

OIH - Shares in the Oil Service Holders Trust retreated another 2.27% to $171.36 this morning, in line with a downtrend following the trust's peak last Tuesday at $188.26. With nearly 40,000 option contracts in play, volume has clustered at the August 170 calls. These contracts traded 7,352 times this morning at prices between $5.80 and $6.10 – a week ago, these same calls were selling for $20.16. Put-side volume has favored the August 175 strike, where 6,000 lots traded. The market is currently pricing in 33.5% volatility for these options.

IVGN - Shares in Invitrogen are up nearly 10% this morning at $78.00 after the company – which produces equipment for use in genetic cloning – reported a doubling in Q2 income. Options traders have put 7,000 contracts in motion – equivalent to just over 10% of its open interest. Today's volume includes more than 2,000 lots traded at the August 70 strike on sharply discounted premiums. With implied volatility at 26.5%, traders are pricing in just 5% more volatility in this biotech than its shares have shown historically.

POZN – Pozen Inc. – A 45% slide in share prices this morning sparked options traders to put 27,800 contracts in motion – more than 10% of its total open interest and nearly three times the average daily volume. With shares at $9.59 this morning, volume is heaviest at the August 12.50, where more than 5,000 lots traded on premiums up 114% on the day.

XHB – S&P Homebuilders ETF – The current turmoil in the home mortgage and home builders sector has taken root in increased volatility – attracting options traders to this sector ETF. Fully 23,650 contracts are in play today – more than 10% of the fund's total open interest and 3 times the daily traffic. Though premiums sharply favor the call side today, volume is skewed to the puts, thanks in large part to the 13,500 lots traded in the December 20 put.

SOHU – Inc. – Shares in this Chinese tech stock are down 3.8% this morning at $32.68, with 7,600 options (equivalent to more than 20% of its open interest) circulating. Volume has been pronounced at the August 30 straddle, while the August 35 put has traded 2,000 times today. Total open interest in continues to favor the call side by a factor of 1.5.

XLF – Financial Select Sector ETF – With a 1.14% gain in the underlying share price this morning at $33.66, 45,341 contracts in the financial sector ETF are in play today, with more than twice as many puts moving as calls. Some 4,800 lots have moved at the September 33 put, with 1,800 lots moving at the same strike on the September call side, and 2,900 contracts moving at the September 34 call. Heavy traffic is apparent in the December activity, with what may be rampant put spread activity between the 30, 33, 34 and 35 strikes.