Wednesday's Options Report: HUM, AET, UNH, YHOO, AA, FSLR, XLB, DNA

Rebecca Engmann Darst co-authored this article.

Early newswire reports confirmed plans by the office of New York Attorney General Andrew Cuomo to launch an industry-wide probe into health-care insurer practices in tandem with an indictment against one of the largest U.S. health care insurance companies. The upshot was immediate in a number of health-care tickers, with massive implied volatility spikes as traders sought long volatility positions in at-the-money straddles and strangles to anticipate a break above or below current share price ranges.

(HUM) – Shares in Humana registered a 3.4% decline to $68.54 as of the noon hour. Long positions in February 65/70 strangle were sufficient to send option volume to 2.6 times the normal level today – its highest level of traffic since late-October, as the equivalent of more than 1 of every 4 Humana option contracts appeared involved in the volatility wager. At $1.25, the price of the 65/70 strangle generates profit for the holder in the event of a break above $71.25 or below $63.25.

(AET) – Option implied volatility in Aetna spiked 15.7% to 35.3%, making it one of the day’s top implied volatility gainers as Aetna shares slid more than 2% to $49.58. Traders showed keen interest to go long in February 45 puts for 10 cents apiece, possibly in combination with February 50 calls for a long 45.50 strangle heading into the press conference. Interest in puts at the 45 strike extended into the March contract, where the 80-cent price of the position is 60% higher than yesterday’s levels.

(UNH) – Nowhere was the downside expectation more pronounced in than in United Health. Implied volatility has rocketed more than 37% higher to 33.2% as of this dispatch. More than half of today’s 35,000-strong option volume appears centered in puts at the February 45 strike, where the value of this position is 1400% richer than was the case yesterday. Shares in United Health are 7% lower at $45.02, already cratering below the standing 52-week high.

(YHOO) – Yahoo! – Early reports suggesting a possible bid for Yahoo from Rupert Murdoch’s News Corp. may be the catalyst behind today’s .81% gain to $29.81 for Yahoo shares. With 54,700 options trading in the first 90 minutes of the market, calls are outmoving puts by a factor of 3.5, with continued interest in the April contract where calls at the 30 strike were bought for $2.20. Some of this may be involved in call-spread activity with the sale of the 32.50 strike capping any upside. March volume showing willingness to sell volatility in the 30/35 strangle, with buying in the March 30 calls for $1.70 anticipating a new break of $30 in the coming weeks.

(AA) –Alcoa - Shares are 2% higher at $34.16, and the fact that 4 times as many calls are trading as puts on a volume of 54,700 lots may be attributed to an early report in the Sydney Morning Herald recycling rumors that Alcoa could be the subject of a takeover bid by (BHP) and RTP. Traders responded by positioning long volatility via the 32.50/35 strangle for a combined 60-cent premium, while interest in the March contract showed eager call-buying at strikes of 37.50 and 40.

(FSLR) – First Solar – Shares the country’s largest producer of solar power modules rocketed 25% higher to $219.66 after Q4 profits increased nearly 8700% on demand for its cost-effective solar panel technology. The 46,000-plus options trading on our platform are among the most heavily trafficked in absolute terms, and represent nearly twice the average daily volume in First Solar shares. Heavy buying interest in calls at strikes of 220 and 240 was counterbalanced by buying in puts at strikes of 200 and 210, suggesting that strangles and collars may be in favor this morning.

(XLB) – Materials Select Sector SPDR – Shares in the commodity-rich ETF are 1% lower at $40.25 this morning, with massive put-side volumes sending overall option volume to nearly 4 times the normal level. It appears as though traders are using the March 33/35 credit spread on volume of some 12,000 lots at each strike to fund the purchase of at-the-money March puts at strikes 38, 39 and 40. The purchase of the lowest strike put in this case curtails anticipated downside in the price of the fund while limiting the cost basis of the trade.

(DNA) –Shares in Genentech are 1.8% higher at $71.17 following news that Genentech’s cancer drug Avastin showed promise in clinical trials for use against breast cancer. The FDA is due to issue a decision on Avastin in 10 days’ time, following an FDA panel recommendation that Avastin’s side effects outweigh potential therapeutic benefits. The 3-fold increase in option volume following the share price boom shows traders taking contrarian long positions in February 70 puts for 20 cents apiece, and going long volatility in the March contract at the 65/75 strangle ahead of the FDA ruling.