Unusual Options Activity Review: BAC, DLB, PSX, ECL, OSG, FMCN, YHOO, RAX, VIX, SPX, XRT

Friday's Bullish Trading
Bank of America (BAC) will be a name worth watching thisweek. The stock lost 22 cents to $9.12 and was the Dow's biggest loser Friday, but is up nearly 30 percent since earnings were last reported in late-July. The strength in the stock might suggest that investors are discounting a good third quarter. The company will report the morning of October 17. On the options front, options on the banking giant were busy as usual. 305,000 calls and 118,000 puts traded on the stock. The largest trade was a hefty "risk-reversal" on the PHLX. According to a source on the exchange floor, an investor sold 30,000 February 8 puts on BAC at 34 cents and bought 30,000 February 10 calls for 41 cents. The combo, for a 7-cent debit, represents a bullish play on Bank of America shares through early-2013. The investor is probably a willing buyer of the stock for $8 and is therefore willing to write the downside puts to collect the premium. That premium, in turn, helps finance the purchase of the upside $10 calls.

Bullish trading was also seen in Dolby Labs (DLB), Phillips 66 (PSX), and (Ecolabs ECL).

Friday's Bearish Trading
Overseas Shipping (OSG) saw an unusual spike in options activity Friday. Shares had a rough week, falling during all five trading sessions and losing 26.6 percent. OSG was down 80 cents to $5.08 Friday alone on heavy turnover of more than 2 million shares. Meanwhile, options volume on the shipping company jumped to 26X the daily average. January 4 puts traded more than 20,000 contracts. November 5, November 4, and January 3 puts were the next most actives. It's not clear what motivated the surge in activity, as there were no obvious headlines on the ticker, but implied volatility in OSG options was up 36 percent and is elevated at 123 – suggesting players in the options market might be bracing for additional volatility in the name going forward.

Bearish trading was also seen in Focus Media (FMCN), Yahoo (YHOO), and Rackspace (RAX).

Index Recap
CBOE Volatility Index (.VIX) added .55 to 16.14 after the S&P 500 Index (.SPX) lost 4.25 to 1428.59 – falling for the fifth time in six days. Trading volume in the index market remains relatively light. A total of 607,000 calls and 772,000 puts traded across all index products Friday, which is about in-line with the daily average, according to Trade Alert data. October 17 calls on VIX were the most actively traded index contract. 51,415 contracts changed hands. Some investors are possibly looking for a jump in volatility early next week and were taking positions in VIX Oct 17 calls Friday. The contract expires next Wednesday and the last day to trade is Tuesday. The last day to trade October options on many other index products is Thursday, before settlement values are computed the morning of expiration Friday.

Analyzing the ETF Market
A large options trade surfaced in the SPDR Retail Trust (XRT) ahead of monthly retail sales numbers, due out Monday morning. XRT was down 38 cents to $62.23 on the day and, in morning action, an investor sold 20,000 October 63 puts on the ETF for 75 cents, bought 20,000 November 62 puts for $1.20, and sold 20,000 November 58 puts at 35 cents. The activity appears to roll a position out one month. That is, the investor is selling to close a position in the Oct 63 puts at 75 cents and buying a new position in the Nov 58 – 62 put spread for 85 cents per spread. If so, they probably had a bearish view on the retail sector and now they are extending the bearish play out an addition four weeks. October equity and ETF options expire at the end of the week and the last day to trade is Friday. November options expire in five weeks.

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About Joseph Cusick

Joseph Cusick currently serves as the Senior Vice President of Education and a Senior Market Analyst for optionsXpress. Mr. Cusick seeks out common sense and technologically scalable educational pathways for self-directed investors of all experience levels. He is largely responsible for ramping up delivery of online and offline seminars to customers and potential clients worldwide. Prior to serving in his current role, Mr. Cusick immersed himself in the broker side of optionsXpress by managing his own book of business. Prior to joining optionsXpress, Mr. Cusick served as a market maker and portfolio manager at the Chicago Board of Options Exchange. Joseph is a graduate of Marquette University and holds his Series 4, 7 and 63 registrations with FINRA.