Monday Options Recap

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Includes: AAL, BAC
by: Frederic Ruffy

Sentiment

Market action is mixed late-Monday. Stock index futures had moved higher along with the euro Sunday night after the pro-bailout New Democracy Party won key weekend elections in Greece. The enthusiasm was quickly quashed, however, after Spanish bond yields moved north of 7 percent on reports of bad loans at Spanish banks. However, trading was orderly at the open on Wall Street and stock market averages seemed to find some support from the NAHB Homebuilder Sentiment Index, which was unchanged at 29 in June. From that point forward, trading has been aimless and in a narrow range. The Dow Jones Industrial Average is down 31 points. The NASDAQ gained 21. CBOE Volatility Index (.VIX) is off 2.21 points to 18.90 amid light volumes in the options market. 5.7 million calls and 5.2 million puts traded across the exchanges so far.

Bullish Flow

BofA (NYSE:BAC) loses 10 cents to $7.80 and July 8 calls on the bank are this morning's most actively traded options contract. Volume is approaching 44,000 contracts (through the first hour) and the flow includes a multi-exchange sweep of 8,933 contracts for 40 cents when the market was 38 to 40 cents and another sweep of 7,836 for 38 cents when the market was 37 to 38 cents. Data from ISE is hinting at closing buyers. The contract is 2.6 percent OTM with a .46 delta and expiring in 32 days. Open interest is 156K and the largest of the front-month contracts in BAC. Shares are down a bit today, but up 13.3 percent during the past two weeks. The heavy trading in July 8 calls indicates that some investors are bracing for BAC to move beyond $8 in the weeks ahead -- a level not seen since May 3. Thirty-day ATM implied vols in BAC moved up 1.5 percent to 50. Earnings will be reported on the morning of July 18, which is the Wednesday before the options expiration.

Bearish Flow

US Airways (LCC) adds 34 cents to $12.37 and a Sep 8 - $12 put spread recently trades on the stock for $1.18, 2000X. It's possibly a position adjustment, as open interest is sufficient to cover in both contracts. Or it might be designed to hedge recent gains after the 144 percent year-to-date surge in the underlying.

Implied volatility Mover

CBOE Volatility Index (.VIX) hit a morning high of 21.98, but then came under fire and is now trading at its lowest levels since May 11. The "fear gauge" fell below the 20 psyche level in early trading and is down 1.67 to 19.44 in midday action. Trading in the VIX pit is active heading into expiration, with 181,000 calls and 275,000 puts so far. 60 percent of the volume, or more than 240,000 contracts, is in the June contracts that, after today, have one day of life remaining. About 2.6 million contracts of open interest, which is about 35 percent of the total OI, is in the June term. The largest positions (in the front-month) are Jun 30 calls, Jun 19 puts, June 20 puts, and Jun 40 calls and today's most actives are Jun 20 and 21 puts. The official settlement value in May was 21.46. The expiration is not the only factor affecting VIX today, however. Important event risk has passed after the pro-bailout New Democracy Party won elections in Greece. Investors are also hopeful that Fed Officials will signal Operation Twist again at the conclusion of its two-day meeting Wednesday afternoon. The S&P 500 is down just .4 points to 1,342.44.