Unusual Options Activity Review: AET, AIG, FRX, CIEN, BAC, URI, JOY, DRYS, .VIX, EWT

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Unusual Options Activity Review For Thursday, May 31, 2012

Thursday's Bullish Trading
Aetna (AET) lost 47 cents to $40.89 and options volume on the insurance giant hit 3X the daily average. 35,000 calls and 3,570 puts traded on the stock Thursday, a ratio of almost ten-to-one. More than half of the call volume was due to one spread trade, in which the investor apparently sold 10,000 June 43 calls on AET at 38 cents and bought 10,000 July 43 calls for $1.49. This June ñ July 43 call spread, for $1.11 debit, seems to be a view that shares will hold below $43 (+5.2 percent) through the June expiration (15 days) and then possibly rally above that level before the July expiration (50 days). Itís also possibly a roll out of June and to July, as an investor might have initiated a bullish play on the stock and is now adjusting that position by opening a new position in the more distant expiration month. Either way, the spread seems to reflect a bullish opinion on the stock through July, but limited upside over the next two weeks.

Bullish trading was also seen in AIG, Forest Labs (FRX), and Ciena (CIEN).

Thursday's Bearish Trading
Bank of America (BAC) ticked 15 cents higher to $7.35 and recent volume on the bank has been light, as some investors might feel somewhat disenchanted after the stockís ongoing slide. Shares lost 9.4 percent in May and are now 26 percent below the highs seen in late-March, when BAC was near $10 per share. 171 million shares traded on BAC Thursday, which is a far cry from the levels seen in March when average daily volume was more than 300 million. Some of the disappointment seems to be reflected in the recent options action as well. Thursdayís flow, for example, included a seller of 20,000 January 7.5 calls for 96 cents per contract. The investor might be liquidating the position now that the contract is out-of-the-money after the recent slide in the underlying. Separately, January 9 calls, which were the most actives in BAC Thursday, were also being sold. More than 43,000 traded, including a 20,000-contract block sold at 49 cents per contract. At the end of the day, 179,000 calls and 67,000 puts traded on BAC, which is only three-quarters of the average daily volume levels, according to Trade Alert data.

Bearish trading was also seen in United Rentals (URI), Joy Global (JOY), and Dryships (DRYS).

Index Recap
CBOE Volatility Index (.VIX) moved in and out of positive territory Thursday. After jumping 3.11 points to 24.14 Wednesday, VIX made an early run to 25.46, but then gave up the gains to finish down .08 to 24.06. The top options trades on the index printed in morning action and were part of a butterfly spread. The investor apparently bought 10,000 June 40 calls on VIX for 69 cents, sold 20,000 June 50 calls at 22 cents, and bought 20,000 June 60 calls at 9 cents. This July 40 ñ 50 ñ 60 call butterfly spread, for a 34-cent debit, seems to be a high risk-reward view that VIX might reach towards 50 by the July expiration. The potential payoff is substantial if the index settles at or near that level, but the entire debit is at risk if the position is held through the expiration and VIX June settlement value is less than 40 at the expiration, which is 19 days for VIX June options.

Analyzing the ETF Market
iShares Taiwan Fund (EWT) ticked 7 cents higher to $12.07 and a July 12 straddle was apparently sold on the ETF at 95 cents, 22000X, to open. In this strategy, the investor sold 22,000 July 12 puts on EWT at 46 cents per contract and sold 22,000 July 12 calls at 49 cents. The position is a new straddle write because volume easily exceeds existing open interest in both contracts. If so, itís not necessarily a bullish or bearish play on EWT, but seems to reflect expectations for range-bound action in the fund, which is has been the case so far in 2012. Shares have added 36 cents, or about 3.1 percent, year-to-date. There is substantial risk in both directions when writing straddles, as one contract (either the put or call) will become even deeper in-the-money if there is a substantial move higher or lower in the underlying. The breakevens at expiration are equal to the strike price of the straddle plus and minus the debit.

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