Monday Options Update: VIX, KFT, HIG, CHK & FCX

Includes: CHK, FCX, HIG, MDLZ
by: Interactive Brokers

VIX Index – Investors thrived on President-elect Obama’s weekend interview comments, as if brought back to life by a direct hit into the bloodstream with a wonder drug. The sketchy plans were broad enough in scope to help send equity values skyrocketing as investors head into the home straight for 2008 hoping to erase what has been a terrible year. Still, there was little repentance in the value of the so-called fear-gauge, which stayed stubbornly close to a reading of 60 despite a 3% forge ahead in the value of the S&P 500 index. In the VIX options there was decent interest in call options expiring in January where several thousand contracts were traded at the three strike prices of 60, 65 and 75, all of which traded to mid-market prices masking whether the investor expects more or less volatility through year-end.

Kraft Foods Inc. (KFT) – Shares in food-maker, Kraft built on Friday’s gains and in so doing saw implied volatility continue to decline. Being a staple company whose products are needed throughout even a recession, the implied volatility reading has remained low throughout, peaking at 57.5% at the market’s low point in October. Investors today used the option market to play out further weakness ahead and sold calls and puts in the April contract to net premium. With Kraft’s share price trading at $28.07 investors appeared to sell uneven amounts of January 2010 calls at 5.30 and puts at 3.20 in what smacked of a straddle. As the afternoon wears on, the build in the put trading appears to have accelerated leaving the picture rather confusing. Investors could be banking on an end to the bear market and relying on Kraft’s staple nature in the hope that shares certainly won’t fall in this recession.

Hartford Financial Services Group (NYSE:HIG) – Shares continue to build on gains made Friday when the company pointed to a better capital status. Today, Metlife did the same and paved the way for further gains. It appears that option traders are using the rally taking shares to $16.00 to bank gains on nearby calls expiring later in the week. Calls at the 17.50, 20 and 22.50 strikes were all largely sold earlier. Still it’s not all plain sailing for Hartford, where implied volatility is actually higher on the day at 197% and some investors are toying with put options expiring January at the 15 strike where two-way action of 2,300 contracts at a premium of 3.50 exceeds open interest of 1,367 lots.

Chesapeake Energy Corp. (NYSE:CHK) – The company performed some major surgery today when one executive apologized for taking the step of filing papers with the SEC announcing its intention to sell more shares in the company, undoubtedly to raise capital. Today the company blamed subsequent weakness in its shares along with rumor-mongering that there was a liquidity struggle. In addition the company announced spending cuts intended to boost its cash position, which appears to have had the desired effect by boosting shares 30% to $14.65. December and January call option positions were in demand at 15, 17.5 and 20 strikes as investors scrambled to offset bearish positions established last week.

Freeport McMoRan (NYSE:FCX) – With Obama’s infrastructure plan sending a strong signal across the market, shares in basic material, construction and engineering companies were in hot demand. Freeport, whose shares tanked last week on copper production cutback news, rebounded 21% to $20.31 as investors bought twice as many call options at the December 20 strike than were initiated by sellers. Put options expiring this Friday at the 17.5 strike were also sold indicating that investors expect the share price to remain buoyant until then. However, at the February expiration investors appeared to sell call options expiring at the 30 strike as they either bought stock and sold calls at a 1.35 premium to boost yield, or they simply ditched long positions on today’s news. More than 4,000 open call positions exists at the strike.

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