XLB - Materials Select Sector SPDR share dropped 4.4 percent to $35.27. The fund holds shares in DuPont, Dow Chemicals and Monsanto amongst its top holdings. Some put buying was evident at strikes in the money. For example the August 40 puts traded 1,000 times at 4.30 while the 37 strike traded 9,300 times as high as 1.85.
AA – Alcoa Inc. shares slid 6.8 percent to $31.39 while options trading on this issue was three times as active as on the XLB. IN the September put series, options prices at the 30 and 32.5 strikes more than doubled as investors sought insurance against further declines against the stock. Alcoa has long been a strong basic material play with its shares advancing as the demand for basic material expanded globally. It has also felt a bid thanks to merger and acquisition speculation over the last several months. The fact that Rio Tinto snatched the Canadian Alcan producer from a close deal last month along with the dry-up in merger activity has created a vacuum beneath the stock.
FCX – Freeport McMoRan shares have tumbled 8.1 percent to stand at $71.70 with options traders favoring puts by a factor of 1.5 in comparison to call options today. August 75 strike puts were active with the shares falling beneath the strike out of the gate. Implied volatility surged 23 percent to stand at 64 percent.
NUE – Nucor Corp. saw its shares slip 6.2 percent to $43.61 to a fresh one-year low. Implied volatility surged 18 percent to 62 percent. Most of the options action occurred in a 2,000 lot call spread in the October contract at the 45/55 strikes at a net cost of 3.10. The investor is looking for a share price rebound on this steel-maker and would stand to make 6.90 per contract should shares rise to the upper strike price at $55.00, where profits would be maximized. Shares have traded at that price last week.
TGT - Target - The consumer sector is likely to be a very rich battleground for volatility plays, simply because of the variety of opinions on the extent to which the average American consumer has been or will be impacted by subprime exposure, and what the outcome will be. If you believe the story being told by Wal-Mart, higher mortgage rates, lower home values and higher gasoline prices are already chipping away at the buying power of ordinary Americans, and Home Depot even expects the deleterious effects of this to last into 2008.
If you don’t believe this argument holds water, but want to take advantage of elevated volatility resulting from this kind of alarmist rhetoric, you might do what one trader appeared to do this morning with a ratio calendar call spread in Target (TGT). With shares trading down 1.36 percent at $57.09, we saw more than 10,000 lots sell in the October 70 calls at .85-.90 apiece, credits which may have been used to fund the purchase of September 65 calls at $1.60 apiece. The delta on these options gives us an indication of the chance options traders are giving these contracts at profitability by expiration. Delta on the August 65 call – expiring on Friday - is a miniscule 1 percent, but the same strike on the September call is 23 percent. The chances of Target shares pulling off a 20 percent price gain by October currently stand at 15 percent, but there’s a higher chance that they’ll be at 65 by then, so the investor hedges his or her chances by selling the October 70 calls, taking a credit, and buying the September 65 calls.
CFC – Countrywide Financial Corp. - Where will shares settle in the nation’s biggest mortgage lender when options expire Friday? Well, right now it’s a real traders market. Shares are down $3.11 or close to 15 percent at $18.25. Meanwhile options activity in the August contract is buzzing with just one day to go. Bets are flying around the pit that shares will tumble by another 17 percent or so to at least $15.00 by tomorrow. Some 8,339 lots have traded today at that strike indicating that buyers expect this event and in so doing are predicting that shares will slump to $14.70 based upon current premiums. The shares are being beaten with the bankruptcy stick in volatile trading Thursday. In the January series 23,000 puts were traded at the 20 strike at around 6.90, while 11,000 lots have traded on the puts at the September 15.0 strike at 3.0. In the October calls heavy volume occurred at the 27.5 calls at prices between 1.3 and 2.1. Since most traded mid-market it’s hard to say whether calls were bought or sold.
The Dow Jones industrial average surrendered 168 points to 12,690.60. The S&P 500 index fell 16.59 points to 1,390.22 while the Nasdaq composite index lost 26.19 points to 2,432.64.
VIX – Volatility traders must have aged by several decades in the course of the last month. Around two-thirds of today’s volume of 89,000 lots has traded in the August contract. With the VIX at a fresh high for this move, registering 33.24 at 11:30am (+8.4 percent) some 4,400 calls at the 35 strike have traded while 11,000 puts are a standout on the put side. Where is settles tomorrow, we dare not guess!
The VXN, which measures volatility across the Nasdaq index, gained 5.5 percent on the day to 29.47.
XLF – Financial Select Sector SPDR shares are a modest 0.3 percent lower on Thursday. Implied volatility reached a fresh cycle high today at 47.4 percent for a 10 percent shift on the day. With the underlying fund’s shares at $32.12 today it is call volume that takes center stage. The 32 strike calls in the September contract traded 31,000 lots while the 33 line traded 23,500 lots. Time and sales shows most calls were bought indicating fresh bullish plays. Bearish put plays were still clearly at work though as investors bought 15,000 puts at the December 28 line.