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Daily Options Intelligence Report

Volatility on the rise as equities reverse GDP gains

Fri, Oct 30 2009, 18:48 GMT
by Andrew Wilkinson

Interactive Brokers LLC  |  View company's profile

VIX – CBOE Vix index – With equity prices sadly wilting by noon on Friday, investors were threatening to completely reverse Thursday’s giddy 2% advance. Traders were despondent after a 0.5% drop in consumer spending last month, which soured the tone following Thursday’s stimulus-stuffed GDP gain. The fear-gauge expanded by 8% to 26.70 as a result and one large options player appears to have placed a trade suggesting that volatility will be omnipresent – at least through year-end. The investor sold 10,000 December expiration puts at the 25 strike for a 1.75 premium, while buying half as many puts in the January expiration at the same strike. If the underlying Vix index settles at expiration above a value of the 25 strike price, the puts would expire worthless. This suggests this investor sees a rocky close to the year with volatility remaining elevated. The purchase of 5,000 puts for a 1.95 premium expiring 30 days later suggests the investor sees a calmer start to next year. 

FEED – AgFeed Industries, Inc. – Shares of the Chinese feed and commercial hog producing company are trading 2.5% higher today to stand at $4.73. The firm received a ‘buy’ recommendation at EVA Dimensions yesterday. Option traders took to the May 2010 contract to initiate bullish positions on the stock. It appears a ratio risk reversal was established through the sale of 3,000 in-the-money puts at the May 5.0 strike for an average premium of 1.43 apiece, spread against the purchase of approximately 9,000 calls at the higher May 7.5 strike for 45 cents each. The transaction results in a net credit of 8 pennies per contract. Shares of FEED must rise and subsequently remain higher than $5.00 in order for investors to retain the full 8 cent credit received on the trade. Additional profits are available in the event that the stock rallies a whopping 59% from the current price to surpass the $7.50-level by expiration in May. Options trading volume of approximately 14,000 contracts today represents about 47% of total existing open interest on the stock of 29,805 lots.


ODP – Office Depot, Inc. – The global supplier of office products and services attracted bullish option traders today despite the more than 2.5% decline in shares to $6.27. It looks like one investor sold in-the-money put options in the January 2011 contract in order to finance the purchase of in-the-money calls expiring in January of 2010. The trader sold 4,000 in-the-money puts short at the January 2011 7.5 strike for an average premium of 2.34 apiece, and purchased 4,000 in-the-money calls at the January 6.0 strike for 1.03 per contract. The investor pockets a net credit of 1.31 apiece on the trade and may retain the full credit if ODP shares rise above $7.50 by expiration in January of 2011. Additional profits accumulate to the upside as long as shares remain higher than $6.00 through expiration day in January 2010.



NRG – NRG Energy, Inc. – The power generation company posted weaker-than-expected third-quarter profits of $1.02 per share versus the consensus view of $1.12 per share previously forecast for the firm. NRG launched to the top of our ‘most active by options volume’ market scanner after one bullish investor initiated a massive calendar spread. Shares are currently 2.25% lower to $23.58. It appears the trader purchased 30,000 in-the-money calls at the January 22.5 strike for about 2.85 apiece, and partially financed the long position by selling 30,000 calls at the March 30 strike for 65 cents each. The net cost of buying the nearer-term calls amounts to 2.20 per contract. Shares of NRG must rise 3.5% from the current price for the investor to breakeven at $24.70. The trader could choose to exercise the call options and take delivery of an equivalent number of underlying shares for $22.50 each. If the investor does take delivery of the shares the short calls in the March contract effectively create a covered call strategy. This implies that the underlying shares may be called from the trader if the stock trades higher than $30.00 by expiration in March 2010. If the shares are called away, the investor will have successfully exited the position and walked away from the table with 33% gains on the appreciation in share price. Finally, near-term bullish investors sold 5,100 puts short at the November 25 strike to take in an average of 1.54 in premium.

Published on  Fri, Oct 30 2009, 18:50 GMT