Monday Options Recap

Includes: AVP, RYL
by: Frederic Ruffy


Stocks are broadly higher, but volumes are light and it's been a slow news day so far. Trading was cautious early Monday, but then stock market averages strengthened in morning trading after ISM said its gauge of manufacturing activity improved to 53.4 in March. Economists were looking for an increase to 53 from 52.4. Construction Spending was down 1.1 percent in February and much worse than the .5 percent increase that had been anticipated. The construction numbers didn't seem to hold much sway, as both the Dow and NASDAQ had forged gains through midday. Crude oil is also up and added $2.19 to $105.21 per barrel. Gold gained $9.7 to $1679 an ounce. The Dow Jones Industrial Average added 80 points and the tech-heavy NASDAQ gained 31. CBOE Volatility Index (.VIX) is starting the second quarter with a .16 point loss and is at 15.34. With forty minutes left to trade (excluding dividend plays), 5.9 million calls and 5 million puts have traded so far.

Bullish Flow

Avon Products (NYSE:AVP) is up $2.88 to $22.25 after Coty Inc made a $23.25 per share bid for the company. Avon rejected the offer and volume in AVP is approaching 40 million shares. By way of comparison, typical volume is about 1.2 million. Meanwhile, levels of implied volatility in the options on the stock jumped 48 percent to 37.5, as players in the options market seem to be anticipating additional news on the buyout front. 18,000 calls and 11,000 puts traded in Avon, which is 15X the daily average for the stock. Apr 22 puts are the most actives. The top trade is a 2200-lot for 55 cents when the market was 40 to 50 cents. Looks like an opening buyer, possibly hedging recent gains in the stock after the 27-percent year-to-date rally in shares. 6,120 contracts changed hands. Meanwhile, some investors are taking positions in upside April 23 and May 24 calls, possibly speculating that Coty will raise its offer and/or another bidder will emerge.

Bearish Flow

Ryland Group (NYSE:RYL) loses 49 cents to $18.79 and an Apr - May 18 put spread is bought on the homebuilder for 54 cents, 12000X. Open interest in Apr 18 puts is sufficient to cover and the spread might roll a position opened on Feb 27, which included a block of 11,700 contracts at the $1.15 asking price. The stock is up nearly 3 percent since that time, and the out-of-the-money Apr 18 puts are being liquidated at 45 cents. A new position in May 18s, which are also 4.4 percent OTM, is being opened for 99 cents per contract. RYL is on a three-day 8.4 percent losing skid, but has doubled in value since early-Oct nonetheless. The spread trade seems to express concerns that the stock will give back some more of the advance through the May expiration, which is in 46 days.

Implied volatility Mover

CBOE Volatility Index (.VIX) loses .27 to 15.23 on a light volume session, with about 8.3 million contracts traded across the exchanges so far. Volume is about 80 percent the normal levels and there are very few big prints to report so far. One noteworthy trade was in the VIX pit after 10,000 Jun 42.5 calls traded on the index for 50 cents along with 20,000 Jun 55 calls at 20 cents. The 1X2, for a 10-cent net debit, traded 13000X and is perhaps designed to hedge some short-term tail risk - as the best payoff happens if the index settles at 55 at the June expiration and VIX has not traded in the mid-50s since the Fall 2008.