Unusual Options Activity Review: HUM, HCA, WLP, PCX, JRCC, BTU, CNX, VIX, EEM

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Unusual Options Activity Review For Tuesday, May 22, 2012

Tuesday's Bullish Trading
A number of healthcare names saw increasing call volume Tuesday. Humana (HUM) was one of them. Shares jumped $1.08 to $76.83 after Wells Fargo upgraded the stock to Outperform from Market Perform. Meanwhile, options volume on the stock was 4X the daily average. Approximately 12,000 calls and 2,000 puts traded on the Louisville, KY healthcare plan provider, a ratio of six-to-one. June 80 calls, which are 4.1 percent OTM and expiring in 24 days, were the most actives. 4,666 traded. August 97.5, July 80 and July 82.5 calls were also busy. In addition to the analyst upgrade, the call buying seemed to be part of broader activity seen throughout the healthcare sector on Tuesday.

Bullish trading was also seen in Health Management Associates (HCA) and Wellpoint (WLP).

Tuesday's Bearish Trading
Bearish activity was buzzing in the coal names Tuesday. Patriot Coal (PCX) was one of the big losers. Shares fell to a record low of $1.36 in morning trading on a Dow Jones article that suggested the company was considering restructuring to meet short-term financing needs. The stock was later halted after the company issued a statement saying refinancing efforts are ongoing. The stock recovered some of the losses when trading resumed, but still lost $1.18 to $2.18 on surging volume of 86 million shares. Meanwhile, 105,000 puts and 40,000 calls traded on Patriot Coal. June 2 puts were the most actives and 30-day implied volatility in the options on the stock surged 106 percent to 248.

Bearish trading was also seen in James River Coal (JRCC), Peabody Energy (BTU), and Console Energy (CNX).

Index Recap
CBOE Volatility Index (VIX) hit a morning low of 19.98, drifted a bit higher through midday, and then saw a late-day spike to close up .47 to 22.48. The late-day jump in volatility was apparently triggered by comments from former Greek Prime Minister Papademos, saying that a Greek exit from the EU is being considered. The euro slid on the headline and is down 1.1 percent to 1.268 against the dollar. Meanwhile, VIX saw a late-day jump and options volume on the index was a very active 331,000 calls and 214,000 puts. June 24 calls were the most actives. 51,300 contracts changed hands, as some investors might have been buying upside call on the index on concerns about the risks of another spike in market volatility in the weeks ahead.

Analyzing the ETF Market
While the Dow erased early gains and finished lower, global equity markets were mostly higher Tuesday and one player in the options market seems to be anticipating the trend to continue. iShares Emerging Markets Fund (EEM) was down 40 cents to $37.78 and one investor apparently sold 26,000 July 32 puts on the ETF at 40 cents to buy 26,000 July 39.5 ñ 40.5 call spreads for 40 cents. The three-way, for even money, takes advantage of skew and the fact that downside puts on EEM have substantially higher levels of implied volatility relative to upside calls. The best payoff happens if shares move to more than $40.5 through mid-July. At that point, the puts expire worthless and the call spread widens to $2. The risk is that EEM falls below $32 per share and the short puts are in-the-money before the expiration. The three-way spread trader is therefore a willing buyer of the underlying at the strike price of the short puts, which is 15.3 percent less than the current market price.



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