Wednesday Options Update: XLE, XLF, WFC, GE, CSCO, ABK, EWT, PPH

VIX – Market conviction is limp today, with indexes drawing straws at directionality over the noon hour – torn between last night’s less-dire-than-expected Alcoa (AA) earnings and a rebound for oil on geopolitical concerns and a draw in weekly inventories. The CBOE Volatility Index is flat-to-lower at 23.11 at present dispatch, showing its almost-instinctual aversion to long stays above 25. Last week, as GM shares led the market sharply lower, we noticed a minor trend among option traders to sell butterfly spreads with calls in anticipation of choppy price action on the VIX away from the 25-strike – essentially playing long volatility on volatility. With little in the way of direct catalysts to push volatility one way or the other today, it looks like the short butterfly call spread returned today at strikes 25, 27.50 and 30 in the August contract, with a trader buying 2,000 lots of the middle strike and buying 1,000lots at the 25 and 30 strikes, again in anticipation of movement in the VIX either violently above or violently below the 27.50 level.

Energy Select Sector ETF (XLE)  – Testy nerves over a series of nuclear missile test-launches in Iran and lower-than-expected oil inventories sent shares in the Energy Select Sector ETF 1.6% higher to $82.72 after yesterday’s generous pullback. With more than 105,000 options trading, the bias is to puts by a nearly 3-to-1 margin. Much of the early action here appears tied up in a single 35,000-lot trade in August 84 puts, which traded to the middle of the market at $4.40. A buyer of this position is playing against the geopolitical rumblings and looking for a pullback below the $80 level (another $3 more off current levels) by August 16.

Financial Select Sector SPDR (XLF)   – Despite downward share price action in the Financial Select Sector SPDR, its shares are down 1.4% to $20.24 today, and seem to be laboring to remain above the $20 mark – option activity shows big-volume block trades occurring at strikes that could suggest  some mid-term recovery for the financial sector ETF. Heavy buying action was observed earlier today in the July 21 and August 22 calls, while further out we observed a 50,000-lot put spread in the January contract between strikes 20 and 25. As we await confirmation of the order flow, a check of time and sales indicated that the higher strike puts were sold at $5.22 against the purchase of 20-strike puts for $2.00, and if this is indeed so, it would suggest a trader taking in a $3.22 credit on the expectation that both puts will expire worthless by mid-January – requiring another 23% to the upside by that time. A juicy bet, but will it come to pass?

Wells Fargo (WFC)  – The seemingly upbeat sentiment surrounding XLF options didn’t extend to Wells Fargo  –  though shares notched .69% higher to $24.87. The more than 73,000 active options qualified the super-regional bank for our scan of most active option contracts, but these are trading more than twice as often to puts as to calls. Also interesting here was a heavy degree of buying interest in October 22.50 puts, where the 10,000 active lots match up to nearly a third of the open interest at this strike, and which would seem to imply a break below the 52-week low of $22.50 by mid-October.

General Electric (GE) – Options volume in General Electric is heating up ahead of the company’s Friday announcement. Shares are down 1.8% at $27.57 but with more than 70,000 options trading it’s one of the most active tickers on our platform heading into the noon hour. Implied volatility remains elevated at about 35.6% against a 27.5% historic reading on the stock, and the most actively traded contract on the screen is the July 28 call, with the equivalent of nearly half the open interest here in play, this being bought on fairly heavy volume of more than 13,000 lots. Call buyers may have been emboldened by yesterday’s relatively easy earnings report from Alcoa, and feel less discomfiture positioning for upside share price action today than they might have a couple of days back. Further out, we do see some evidence of long volatility positioning at the August 25 line, a position for which a trader would pay about $3.50, looking for a price break above $28.50 or below $21.50 heading into August.

Cisco (CSCO) – Shares in Cisco declined 4% to $21.97 after the company’s CEO told Reuters news agency that its customers aren’t looking for a rebound in tech spending until late 2008 or early 2009. The CEO’s frank remarks were redoubled by negative forecasts for its earnings by analysts at J.P. Morgan and UBS. Interestingly, while Cisco’s share price action didn’t put too fine a point on the unimpressive results the market is looking for from the world’s largest computer network equipment maker, it seemed to elicit a heavy degree of buying interest in August 23-strike calls. The equivalent of more than half the open interest at this strike was at play, consisting mostly of offers lifted at 54 cents per contract (a 40% discount from yesterday’s levels). This may be closing purchases of previously opened call positions, or calls bought to hedge a short position in Cisco stock - or even a counterintuitive play on share price action in the wake of its August 5 earnings. Front-month action showed heavy buying action in puts at strikes 21 and 23, with August puts at the 20, 22 and 23 strikes active as well.    

Ambac (ABK)  –  Shares in the monoline insurer rose 12.3% to $2.37 today and are now within about 12 cents of the lowest strike available in its options. This may explain the evidence of goodwill buying in July 2.50 calls at 25 cents apiece, but we also observed buying pressure at the August 2.50 put line, trading for 65 cents. Option traders currently see about a 40% probability of Ambac remaining below the $2.50 level through mid-August. Similar volumes and order flow at the January 2.50 line suggest long straddle activity in that month – a combination which costs $1.80 (more than half Ambac’s current share price) but would cover the buyer in the event of a recovery past $4.30 in January or – even more ominously – a decline to 70 cents.   

iShares MSCI Taiwan Index (EWT) – Following news that Taiwanese companies have sustained $1.4 billion in losses emanating from exposure to subprime loans, shares in the iShares MSCI Taiwan Index showed a 1.7% decline to $13.38. A 10-fold increase in option trading volume detected by our market scanners showed fresh call spread activity involving 21,000 lots in the September contract at strikes 14 and 15. Both sides traded to the middle of the market, leaving the order flow a bit of a mystery. Let it suffice to say that a buyer of the spread would pay a 35-cent debit on the transaction in the expectation that the ETF will trade within quite a narrow 65-cent range by September – perhaps a bit uncharacteristic for a stock that’s already traded as low as $13.31 and as high as $17.34 within the past 6 months. A seller of that call spread would take the 35 cent spread as a credit, betting on sustained restriction from the $14 line for the ETF that would make both calls expire worthless.

Pharmaceutical HOLDRs Trust (PPH) – Shares in this pharma-indexed ETF rose 1.2% to $70.66 as we registered an increase in its option trading volume to 2.4 times the normal level. Front-month calls at the 70 strike were bought on volume of more than 2,000 lots at $1.40 per contract, implying continues gains past current levels over the next week and a half. Further out it looks like a 1,000-lot strangle may have gone through between January’s 65 and 75 strikes, a combined position costing $3.67. A buyer is looking for a break to the upside past $78.67 or a decline below $61.33, while a seller expects shares to trade in a $65-$75 by mid-January, entitling him to the $3.67 premium. Shares in the trust have traded as low as $66.57 and as high as $82.66 over the past 6 months. 

Rebecca Engmann Darst contributed to this report.

Comments

[chrispycrunch]

No matter what the options market is telling investors, I am simply staying away from financials and real estate. The CSCO negativity raises eye brows because tech seems to be the only area with relative strength to s&p500

[Ishortyou]

well most of them are going to be fine according to this technical analysis:
seekingalpha.com/artic...