Thursday's Options Report: GOOG, GDX, DBA, XLE, COCO, BGP, URBN, USO

(GOOG) - Google – While the usual spectator-worthy liquidity in Google options has taken a backseat in recent sessions as drama in the financial, and now, commodity spaces has played out, it looks as though the search engine’s March contract is going out like the proverbial lion (rather than the proverbial lamb today). The catalyst appears to be this morning’s estimated profit downgrade by analysts at RBC Capital Markets, citing the prospect for softer sales growth. With more than 106,000 options trading as of the noon hour, traders had put nearly 20% of Google’s open interest in play as shares dipped 2% to $423.82 on the news. With implied volatility showing a 20% elevation above the historic reading, call options at the March 430 strike have already attracted volume in excess of open interest despite the fact that these contracts expire today – these selling primarily to the bid. Meanwhile, heavy traffic on either side of the 420 line suggests that traders may be buying and selling at-the-money straddles in anticipation of a last-day hurrah for shares. At $6.40, a buyer of the straddle can profit from a 1% move from current levels, where a seller expects shares to remain at the $420 by the close, making the call and put pointless to exercise.

(GDX) – A sharp $25 correction in gold prices sent shares in the Market Vectors-Gold Miners ETF, whose components include gilded eminences Barrick Gold, Goldcorp, Newmont, and Harmony Gold – on a continued downward slope, staging a 4% drop to $47.16. A relatively new development over the past 2 weeks has been a consistent rise in implied volatility, gapping far above the historic reading. Where the two readings were at parity during the first week of March, option traders are now pricing in a 40% higher risk premium to the gold sector over the next month. Option traders haven’t accumulated anywhere near the level of protective put positions in the gold ETF that they have in the oil or materials funds, which are also trading lower these days. In fact a look at its 300,000-strong open interest shows 2.5 call options open for every put, a proportion that has steadily risen since the first of the year. With that in mind, it looks like traders are still willing to position bullishly in the fund, using today’s acute price pullback to scoop up long positions in April 48 calls at prices around $2.50. The move implies a pull back above $50 heading into April.

(DBA) – This week’s easing in commodity prices, long in coming and loath to tarry though it may be, carried over into a 4.6% decline in the price of the PowerShares DB Agriculture Fund, an ETF correlated to the Deutsche Bank Liquid Commodity Index –Optimum Yield Agriculture Excess Return Index, which mirrors the agriculture sector. The past week has seen a strong and steady 28% run-up in implied volatility, with a 10-percentage point spread between the readings showing option traders now figuring in about 25% more price risk out of the agriculture sector over the next month than has already been documented. With more than 24,000 options trading by noon today, the ETF is one of the most heavily trafficked on our market scan of Most Actively Traded Option Contracts. It appears that one trader may have used a reverse collar strategy in the January ’09 contract to protect a short position in the underlying stock, selling the January 35 put for $5.00 while buying the 50 call for $2.10. Selling the higher-priced put allows the trader to fully underwrite the call purchase, with $2.90 to spare, while the long call position shields the short underlying stock position against a rise in the price of the stock.

(XLE) – Energy Select Sector SPDR - This morning’s retreat below $100 for crude oil futures translated to a decline of barely half a percent in the sector ETF to $70.37. But a 7-percentage point spread between historic and implied volatility shows options traders looking for a one-fourth more share price rockiness out of the sector than it has shown historically, and the fact that 8 times as many puts are moving as calls this morning suggests that the risk is to the downside. At-the-money April 70 puts are being richly sought by buyers today, commanding premiums of $3.52-$3.55, suggesting a pullback to the mid 60’s by April. It also appears that a trader may have sold out-of-the-money puts at the June 57 strike for $1.30 as a funding mechanism for the purchase of $69 puts, which at $5.00 per contract would otherwise have required much more dramatic downside in the sector ETF to land profitably before June’s expiration.

(COCO) – Corinthian Colleges – Option activity in the for-profit vocational training provider surged to 20 times the normal level as shares advanced 4% to $7.24 – still within a dollar of the 52-week low. Last week it was announced that Corinthian was the subject of a class-action lawsuit by graduates of its medical assistant vocational program. At issue is how accurately Corinthian may have represented the job prospects and salary levels of the program’s graduates. While implied volatility is holding fairly steady at 72%, where it has remained for much of the year to date, puts are trading at a 2-month high, with volume at the April 7.50 put line trading for 75 cents implying a pull back to its lows over the next few weeks. The activity here has sent overall volume to 19 times the normal level in Corinthian

(BGP) – Borders Group – Shares in the besieged bookseller lost a third of their value this morning, trading at $4.71, after the company indicated that it might put itself up for sale, and had secured financing commitments from Pershing Square Capital Management LP to help it continue operating through 2009. We noted that yesterday’s at-the-money straddle favored a $1up-or-down move on back of the earnings announcement, and that option traders appeared keen to give Borders the benefit of the doubt and buy calls at the 7.50 line. So far today that straddle has been worth as much as $2.85, but option traders are looking beyond traditional volatility plays and shedding call positions at the 7.50 line in the April contract. The activity here has sent overall option volume to more than double the normal level.

(URBN) – Urban Outfitters – Shares in the skinny hipster clothier posted a 2% gain today to $29.83, and while the near-doubling in option volume is due in large part to the apparent closing out of call positions at the March 30 line, we were more interested to see where new positions were opened up – namely, at the September 35 call line. These traded to the middle of the market for $2.30, making it hard to state definitively that they were bought. A buyer of this contract is looking for a break past $37.30 that would put Urban Outfitters at new all-time highs just following the back-to-school shopping season. Shares are up 8% for the year to date.

(USO) – United States Oil Fund - A litany of market voices has been portending a pullback in the value of the spot WTI-correlated US Oil Fund for weeks now, and today’s 2% decline to $80.49 may be the beginning of that unwind. The fact that nearly 5 times as many puts are trading as calls certainly makes a case for the bears today, as implied volatility is so elevated as to imply more than one-third additional price to the fund’s shares over the next month than they have shown historically. Buyers are put protection are doing so at the April 79 line, and gladly paying a 20% higher premium of $3.90 than they would have yesterday. Option traders hold more than 3 times as many puts as calls.