Unusual Options Activity Review: X, HES, SHAW, RENN, LO, FII, EXH, CPN, .VIX, UNG
Unusual Options Activity Review For Friday, January 27, 2012
Friday's Bullish Trading
US Steel (X) shares added 51 cents to $29.88 on the day and gained 7.8 percent on the week. One player seems to be anticipating additional gains in shares of the steelmaker and late-Friday initiated a February 31 ñ 33 (1X2) call ratio spread on the stock for 21 cents, 5000X. In this trade, 5,000 February 31 calls were apparently bought on US Steel for 95 cents per contract while 10,000 February 33 calls were sold for 36 cents each. The spread is bullish, as it offers its max payout if shares settle at $33 at the February expiration, which represents a 10.4 percent rally over the next three weeks. The spread trader is possibly anticipating good news when the company reports earnings next Tuesday. There are two risks to this spread. First, shares could remain below $31 and, if the position is held to expiration, the debit is lost. Second, if shares rally, the trade can lose money because the strategist sold twice as many 33 calls compared to the 31 calls, which were bought.
Bullish trading was also seen in Hess (HES), Shaw Group (SHAW), and RenRen (RENN).
Friday's Bearish Trading
Lorillard (LO) shares have been volatile. The stock lost $3.90 to $107.48 Friday on volume of 2.3 million shares, which is more than double the daily average for the cigarette-maker. LO is on a two-day 6 percent losing skid and made a move below its 200-day moving average Friday. The slide in the shares might have been motivated by earnings from peer Altria (MO) and seems to have stirred up some bearish activity in the options market. 14,000 puts and 2,870 calls traded on the stock Friday. One noteworthy trade was a February 100 ñ 85 put spread, in which the strategist bought 500 Feb 100 puts on the stock $1.15 and sold 500 Feb 85 puts at 30 cents. An 85-cent debit was paid for this bearish spread, which offers its best payoff if the stock falls to $85 through the February expiration, or a 20.9 percent swoon over the next three weeks.
Bearish trading was also seen in Federated Investors (FII), Exterran (EXH), and Calpine (CPN).
CBOE Volatility Index (.VIX) slipped .13 to 18.44, even as the Dow Jones Industrial Average lost 75 points Friday. While the Dow fell, the NASDAQ recorded an 11 point gain and the S&P 500 gave up just 2.1 points. The pattern of mixed trading has lessened overall levels of market volatility and, since VIX tracks the expected volatility priced into S&P 500 Index options, it has been moving lower in recent weeks. The index is down 21.1 percent year-to-date. Meanwhile, the historical volatility of the S&P 500 over the past thirty days ñ which is computed using the annualized standard deviation of closing prices ñ has dropped to only 10.4 percent. So, at 18.44, VIX remains extremely elevated relative to the S&P 500's actual volatility. The relatively high reading probably reflects some "risk premium" priced into S&P 500 options because recent memories of volatile trading in the fall 2011 remain. Portfolio managers are still willing to pay up for downside portfolio insurance ñ i.e. S&P 500 puts ñ and this is keeping a bid under expected volatility (VIX)Öfor now.
Analyzing the ETF Market
US Natural Gas Fund (UNG) finally had a good week. Shares gained 26 cents to $5.88 and rallied more than 15 percent from the levels seen last Friday. Prior to this week, shares had suffered a 56.8 percent slide since May and were probing all-time lows. Meanwhile, options on the fund have been actively traded in recent weeks and open interest, which measures the number of open positions in an options contract, in the February 6 calls on UNG had ballooned to 77,915 contracts - by far the largest position in the ETF. The contract is now 2 percent out-of-the-money and some investors were apparently liquidating positions Friday. 47,330 UNG Feb 6 calls traded on the fund and, with 65 percent trading on the bid, it seems that sellers were dominating the flow ñ possibly exiting positions with an opinion that the recent rally in natural gas prices may have run its course for the time being.
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