Tuesday Options Update: VIX, XLF, YHOO, IRM, SHPGY, SKX, NTES, BBBY

Rebecca Engmann Darst co-authored this article.

CBOE Volatility Index VIX – A somewhat surprising, if uninspired, move higher in major indices today led the CBOE Volatility Index to contract marginally today, down 1.5% to $33.33. A look at the options activity suggests that some traders may be using diagonal calendar call spreads to sell still-elevated October calls at the in-the-money 25 strike and buy 26-strike calls. This may also be the rollout of existing positions at those strikes. In either case, the strategy implies traders operating under the belief that those November calls are underpriced relative to the October positions and may be looking to lock in volatility protection well into the fall.

Financial Select Sector SPDR (XLF)  – Meanwhile, shares in the Financial Select Sector SPDR  are quickly letting slip early gains, trading .19% higher at $20.59 as congressional hearings over the nuts and bolts of the Bernanke/Paulson bank bailout package continue, and after Oppenheimer analyst Meredith Whitney unleashed a new wave of bank downgrades. Put positions have been dominant throughout the session,  currently outpacing cals by 2.5 to 1 as we register significant buying interest in OTM January puts at strikes 10, 12 and 13. Total option volume stands just below 150,000 lots. 

Yahoo! (YHOO)  – One day after a pair of stock-buyback plans from leading tech companies offered a brief moral boost to some tech stocks, shares in Yahoo! are trending with industry peers, showing a 1.6% increase in to $18.98. Earlier today the move higher in share price coincided with heavy buying interest in January 30 calls at 21 cents per contract. We cannot confirm whether these were opening or closing purchases, but the 20,000-lot size of the purchase here is significant. We also observed what looked like call spread position in the October contract between strikes 30 and 32.50, in what was either a short call spread position (a bearish indicator) or the closeout of a long call position. Implied volatility at 67.0% shows a significant elevation above the 42.6% historic reading - this is a disparity that has remained more or less constant since early September.

Iron Mountain Consulting (IRM) – Yesterday we noted what appeared to be knock-on effects in the options of consulting firms with heavy exposure to financial services – in Monday’s case, this involved bullish positioning in Navigant Consulting. Today we see traders taking a divergent tack in a sector peer. Shares in Iron Mountain Consulting, a firm that specializes in electronic records management for banks and other Fortune 500 companies, are showing a .62% decline at present at $25.80, keeping the share price within $2 of its 52-week low. A trader appears to be bracing for a possible breach of that low in the coming months, entering a 3,000-lot long put spread between strikes 20 and 25 in the January contract. This position, which carried with it a $1.50 debit, would require a break below $23.50 to break even for this trader, paying out $3.50 if Iron Mountain’s share price is trading within range of the strike prices by January 16. The activity here sent overall options volume to more than 26 times the normal level.

Shire (SHPGY) – Options in drugmaker Shire ticked our volume scanners owing to an increase in fresh trading activity that amounted to some 21 times the normal level. This occurred against the backdrop of a .71% decline for the share price to $50.08, but amid elevated volatility – 43.4% composite versus a historic reading of 34.6% on the underlying stock, suggesting readiness among option traders of a potential 25% additional risk to Shire’s share price over the coming month than has been proven historically. Shire stock has gained about $7 in value since hitting its 52-week low back on July 16. A couple of different strategies have been at play here today. First it appears that a trader may have either sold a 1,250-lot strangle or entered a 1,250-lot collar in the October contract between the 47.50 puts and the 52.50 calls. While a short strange would have generated $2.40 in upfront premium for the trader, a long collar would represent an entirely no-cost method of protecting an underlying stock position by selling a call and buying a put at identical prices. A 2,500-lot position entered about 10 minutes later showed a trader selling the November at-the-money put for $3.00.

Skechers (SKX) – Shares in sturdy urban footwear maker Skechers are up nearly 3% to $17.43 in current trading. Implied volatility, it bears noting, at 55% rates well below the 63.4% historic reading on the stock – and a substantial normalization in volatility from mid-July highs. Volatility setups of this nature tend to make long option positions more economical – and indeed it appears here that a trader may have entered a new position at the November 17.50 call strike for $1.35, looking for upside into the fall and subsequent to the shoemaker’s October 24 earnings report. Shares are off 10.3% for the year to date. The buying interest here was sufficient to send options volume to nearly 5 times the normal level.

Netease.com (NTES)  – Netease.com ADR  – American depositary receipts in this Chinese chat site are holding on to a .39% increase this morning at $23.17 as an increase in options trading volume of 4 times the normal level shows buying interest in October 25 calls and 2-way traffic at the 30 strike. Netease has traded as high as $26.91 over the past 52 weeks, but the move in the company’s options suggests traders looking for more potential volatile price movement – implied volatility on all Netease contracts rose 22% to 59.8%, ranking it among the day’s top volatility gainers. 

Bed Bath & Beyond BBBY – Bed Bath & Beyond  shares are reading 2% lower at $30.16 on the eve of the housewares chain’s quarterly earnings report. An increase in options trading volume to 1.5 times the normal level showed up in the form of a 2-by-1 put spread in the front month between strikes 27.50 and 30, in which a trader sold 2 of the lower strike and bought 1 contract in the upper strike for a net debit of 30 cents. This caught our attention given the current share price action as it implied defensive positioning with a clear limit – leaving half the short put position uncovered suggests that the trader doesn’t anticipate a significant downside move below the southernmost strike price. Implied volatility at 52.8% rates below the historic volatility reading of 55.3%.

 

Comments

[Keith Jones:]

Steer clear of Yahoo! they are owned by Mafia and are affiliated to pornographers who use captive women, see here endmafia.com

2008 Oct 01 03:07 AM