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Daily Options Intelligence Report

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Dollar index bull fund call options continue to attract attention

Fri, Nov 6 2009, 18:44 GMT
by Andrew Wilkinson

Interactive Brokers LLC

UUP - PowerShares DB U.S. Dollar Index Fund – Call options continue to be bought again today in this ETF tracking the performance of the U.S. dollar index. We’re coming around to the view that rather than expecting a bullish perspective on the behavior of the dollar, some savvy options traders paid attention to the filing on Tuesday by the fund’s managers who noted that they may have to create more shares in order to meet growing demand. Heavy option activity followed, which may have created further liquidity issues at the fund and caused a short squeeze on Thursday when shares were halted pending this announcement. What is noteworthy is the fact that the UUP veered off in a direction all of its own, surging two percent at a time when the dollar index was practically unchanged. So we’re not quite sure what the buyers of November and December 23 strike calls are doing on the other side of this trade. It’s possible they have a ready made hedging or arbitrage position to offset as many calls as they can. Open interest in the November calls today grew to 310,000 from 40,000 on Monday, while the 20 cent premium today has seen a further 30,000 contracts change hands. The dollar did get a short-lived boost after the rate of unemployment broke the double-digit barrier earlier in the morning. Non-farm payrolls fell by 190,000 in October lifting unemployment to 10.2% - the highest in 26 years. Dollar buying as a safe haven quickly abated as investors came round to realizing that the economic gloom continues to clear.

VIX - CBOE Vix index – Equities traded either side of unchanged after nerves were soothed in the wake of the unemployment reading. Yet now that the Dow industrials average has reclaimed 10,000 and the earnings reports at eight-out-of-10 S&P 500 index constituents have beaten estimates, fear has once again slipped. This time last week saw heavy demand for the protection that option premium offers investors but a week later the vix index has slipped back to 24.73. There was contrarian call option buying to be found though. Investors bought 5,000 calls maturing in January at the 27.5 strike and twice as many calls at the 35 strike for what’s shaping up to be a rich 1.35 premium. Elsewhere there appears to be significant put selling at the December 22.5 strike where almost 28,000 lots have traded at 50 cents. Either someone has a strong desire to sit on an attractive 50 cent bid, making room for arbitrage selling or someone is abandoning a long position as the whole volatility trade goes sour.

AONE - A123 Systems Inc. – Heavy-duty lithium battery manufacturer took a Thursday thumbs-down from CNBC’s Jim Cramer, who in his infinite wisdom proclaimed that the easy money has been made on the stock. As a result today shares are down 3.5% to $17.00. Only two months ago did the company see its stock jump draw a crowd when the IPO saw its capitalization rally by 50% right out of the gate. Option sellers turned up to short call options expiring in December with a 22.5 strike price. By writing calls at the strike for a 45 cent premium, these investors guarantee delivery of stock in the event that the share price recovers by 32% from its current price. It doesn’t appear as though this activity suggests covered call strategies given the pace with which the stock is in decline today.

SWKS - Skyworks Solutions, Inc. – Shares of the semiconductor maker surged 8.5% today to $11.91 after the firm set a profit target above analysts’ expectations and stated revenue will likely grow in the current quarter. SWKS posted fourth-quarter earnings of 24 cents per share, beating street estimates by 2 pennies, on revenue of $228 million. Bullish options action took place in the January 2010 contract where one investor initiated a call spread. The trader purchased 5,000 calls at the now in-the-money January 10 strike for a premium of 2.00 apiece, spread against the sale of 5,000 calls at the higher January 12.5 strike for 60 cents each. The net cost of the transaction amounts to 1.40 per contract. The trader may pocket maximum potential profits of 1.10 per contract if shares rally up to $12.50 by expiration in January, but the decision to buy in-the-money call options suggest a desire to take ownership at expiration. Option implied volatility contracted 30% following earnings to arrive at the current intraday low of 49%.

CLX - The Clorox Company – Option implied volatility on the maker of household and consumer products jumped 8.31% to 21.69% amid increased demand for call options on the stock and a 0.5% rally in shares to $59.83. The firm reported a 23% increase in first-quarter net income on Monday and raised its full-year profit outlook. The supplier of bleach said profits were lifted by increased sales of disinfectant wipes to stave off the H1N1 flu virus. Investors exchanged more than 2,500 calls at the December 65 strike within the first 45 minutes of the trading session.

BCSI - Blue Coat Systems, Inc. – Early morning put activity pushed the supplier of proxy appliances onto our ‘hot by options volume’ market scanner. Shares are slightly off by 1% to $25.02. BCSI announced plans yesterday to cut approximately 10% of its staff as part of a new restructuring plan. Blue Coat also revealed it will acquire S7 Software Solutions – a software R&D firm based in Bangalore, India – for approximately $5.25 million. Implied volatility edged up from 54% to the current reading of 57%.

NVDA - NVIDIA Corp. – Third-quarter earnings of 19 cents per share for the semiconductor company beat street estimates by about 9 cents and sent shares up more than 6% to $13.04. Option implied volatility contracted 22.22% to 41.78% following earnings. Investor exchanged more than 8 call options to each put contract in play on the stock. Upwards of 27,300 option contracts changed hands on NVDA by 10:30 am (EDT).

Published on  Fri, Nov 6 2009, 18:46 GMT