Tuesday's Options Report: Blue Nile, Energy Transfer Equity, Harmony Gold, Novellus, Urban Outfitters, Metlife, Sina

Blue Nile Inc. (NILE) is one of Tuesday’s largest decliners in implied volatility, where options volatility has slumped by 35 percent to a reading of 4 percent today. Today shares are once again at a record high – up 6.2 percent to stand at $87.23. For the six months through April its share price was confined to a $32-$42 band, but then shares took off on a rocky journey towards today’s peak as they doubled in value. Historic volatility on the stock is running at 50 percent. Options volume at 5,122 contracts represents around one-in-eight contracts held. The online jeweler seems to have gained plenty of traction in investor circles and the strong growth in sales, profits and margins has many believing that Blue Nile is quite the diamond mine.

However, as noted above the reason this stock is of note to us today is on account of the loss of implied volatility, which means options sellers are in ascendancy. To give you a quick sense of how this plays out, the cost of the combined call and put at the 90 strike, just a little above the current share price, has fallen today from 13.75 to 7.95. The strategy is known as a straddle and is a classic volatility play aimed at harnessing changes in the way options prices are derived rather than taking a directional view on the stock.

ETE – Energy Transfer Equity LP is a gas and propane transporter, whose shares have joined the ranks of other energy companies at which share prices have fallen heavily in the past couple of sessions. Its share price, having shed 14 percent during the last week has rebounded by 2.8 percent Tuesday to stand at $37.15. Along with the firmer ground was a slide in implied volatility from 45 to 28 percent. So the September 40 calls have traded a little easier in price today despite the uptick in the share price thanks to lesser uncertainty around the company and the sector. The overall volume today is low, but once again the combination with the September 35 strike put contracts demonstrates an example of a strangle at play in Tuesday’s session. The combined premium as of the close on Monday would have cost an investor 2.5 (calls 0.90 and puts 1.60). Today, thanks to the drop of 38 percent in the reading of implied volatility, that strangle combination is worth 0.90, proving once again that volatility can be played from both sides of the fence.

MDY – Midcap SPDR Trust Series is 0.5 percent higher Tuesday at $155.00. Options wise, it appears that a large put spread involving around 52,000 contracts has traded in the September series between the 156 and 159 strike prices. The two trades combined make up 22 percent of current open interest on the midcap ETF. It looks as though the net cost of the trade was 1.3. At a share price at or below the 156 (lower) strike at expiration the trade is worth 3.0 minus the trade cost.

HMY –Harmony Gold Mining – Shares in Africa’s third-largest gold producer continued its freefall, down 13.25 percent to $9.56 in early market action, one day after the hasty exit of CEO Bernard Swanepoel. Options demand remains sharply elevated, with today’s volume moving at more than 6 times the average rate. Some 9,645 contracts have changed hands today, with twice as many calls moving as puts, due to heavy activity at the September and December 10.0 strikes.

NVLS – Novellus Inc – Options in chip equipment maker Novellus are trading at more than three times the average daily volume, with nearly 22,000 contracts in play. Today’s traffic is fixated in the September puts, where 12,000 lots have traded at the 27.50 strike and a further 8,000 have logged to the 32.50 strike – possibly attributable to put spread activity involving the purchase of the lower strike price at a premium of 1.40 against the sale of the higher strike price to collect a premium of 4.90 per contract. Premiums are 7-8 percent lower on both of these strikes. Novellus shares are down three-quarters of a percent at $27.08. Over the past year, Novellus shares have posted returns of 7.8 percent – underperforming its market peers on the the S&P Information Technology Index by more than 20 percent.

URBN – Urban Outfitters Inc – Shares in the trendy fashion retailer are up 10.4 percent in early trading to $23.40 after the label reported a 5 percent increase in same-store sales for Q2, beating street estimates. The upside move was attributed to significant sales gains at its Anthropologie and Free People subsidiaries, which largely offset declines in same-store sales at the eponymous Urban Outfitters chains, which reportedly resorted to aggressive markdowns in order to clear inventory. We observed heavy call buying in the September series, at the 20 and 22.50 strikes. Sharply elevated premiums on the call-side are indicative of the high level of implied volatility – some 54.4 percent – currently being priced into Urban Outfitters options at present.

MET – Shares in Metlife (MET) captured a quarter-percentage point gain in early trading, trading at $63.45 at the top of the noon hour. The development comes one day after the insurer announced plans to acquire Texas-based SafeGuard Health Enterprises, in a bid to expand its dental and vision benefit offerings on key markets in the American south and southwest. Today’s 8,600 active option contracts are equivalent to more than 10 percent of its open interest, with puts outmoving calls by a factor of 2.5. Heaviest volume has been seen in the September 60 puts, where 2,000 lots traded on premiums up nearly 5 percent on the day. A buyer of this put acquires the right to sell MetLife shares at $60 apiece by the contract’s expiry next month – but given current premiums, the transaction only breaks even if shares dip below $57.75.

SINA – Sina Company – Yesterday’s Q2 report for the Chinese online media and mobile services company revealed net revenue growth well within the company’s guidance for the quarter and an outsized surge in advertising revenues, but guidance for Q3 sales is likely to fall short of prior analyst estimates. The news sent shares down 5.7 percent today to $39.16 – move that some analysts are calling a necessary correction given the 45 percent gain in Sina shares for the year to date. Options volume has spiraled to 4 times the average rate, with puts outpacing calls by a factor of 1.6. Traffic has gravitated to the September 45 put, where nearly 2,000 lots traded, and December 40 puts, where 1,170 lots traded. Implied volatility on these options stands at 39%.

VIX – Volatility is mixed today with the CBOE Volatility index marginally lower despite a softer tone to equities, while the VXN, measuring implied volatility across the Nasdaq market is 2 percent higher at 22.88. By 11:30am the VIX index was 0.2 percent lower to stand at 22.88.

Despite the weaker tone to the VIX, some 38,800 calls traded at the September 25 strike price today at a reduced premium at 1.65. The November calls at the same strike traded 8,000 times at a premium of 1.95. Both trades imply that investors see no let up in volatility anytime soon.

The August 19 puts on the VIX fetched a premium of 0.50 on volume of 1,900 contracts while insurance at the 20 line was priced at 0.85 today.

By 11:45am the Dow Jones industrial average was 0.12 percent lower at 13,457.00. The S&P 500 index was 0.1 percent firmer at 1,469.07 while the Nasdaq composite index declined 0.10 per cent to 2,544.83.