VIX – Wilting investor sentiment on back of Citi’s killjoy writeoff and soft retail sales numbers made a dent in the Dow – down 280 points heading into the close. In bygone days, we might have expected a sharp move higher in the Volatility Index, which being tied to the S&P, tends to couple inversely with movements in that index. Surprisingly, the index read just 1.35% higher this afternoon at 23.21, having failed to register a close above 25 in a full week. This would seem to corroborate that even as the economic picture sours, it continues to gain clarity, cooling the volatility outlook considerably. With January VIX calls due to expire, it was little surprise to see heavy traffic at the January 25 calls as investors rushed to close those out-of-the-money positions. A look at the February contract shows call-spreaders out in force at that month’s 27.50 and 30 strikes. This looked to us like bear call spread activity, with a trader selling the 27.50 calls at around $2.00 apiece, buying the February 30 calls at $1.15 in a generally volatility-bearish play and pocketing the $850 premium per contract in the expectation that both strikes will expire worthless in February.
BEAS – One of a handful of tickers to close in positive territory, e-commerce software maker BEA Systems closed .90% higher at $15.61 today on no apparent news catalyst. Calls outmoved puts by a factor of 7 and a half, with total options trading at more than 12 times the normal level. Liquidity was drawn to at-the-money calls in February and March. Particularly interesting that this seemed to involve fresh short positions in the March contract, possibly anticipating a leg down for BEA Systems shares in the next two months. Implied volatility at 51% is sharply elevated above the 33% reading, indicating that premiums reflect 54% more volatile price action in BEA Systems shares than they have shown historically.
XLB – This week’s news of a decline to 19-year lows in the reading of the Baltic Dry Index, which measures commodity shipping costs on international trade routes and is interpreted as a indicator of economic growth, coincided with a decline in the value of the XLB, the materials select sector SPDR. Components of this commodities-rich ETF include Monsanto, Freeport-McMoRan Copper, Alcoa, and Newmont Mining Company. With the underlying price of the XLB closing 2.7% lower at $40.18 – down 2.6% for the year to date, but following a year in which it gained more than 15% in value – XLB options rate among the top-20 tickers according to our “Most Active by Option Volume” scanner. This volume appeared in fresh long positions in February 40 puts, which traded more than 38,000 times for about $0.40 apiece. A position at this strike gives the buyer the right to sell the underlying ETF share for $40 in February, anticipating a break below current levels.
RF –On a day of such unmitigated bloodletting in the financial space, we were surprised to see not just a 10-fold increase in trading activity according to “Hot by Options Volume,” but also very restrained price action in Regions Financial Corp. The company closed .34% lower on the session at $20.34, having traded in plus territory for much of the day. This multi-bank company provides mortgage banking, credit life insurance, securities brokerage and other services over the South, Midwest and Texas. Lest one conclude that flyover country is somehow “pass-over” country for financial losses, bear in mind that Regions has given up nearly 47% of its share price over the past 52 weeks, underperforming even the S&P financials index. The company is currently trading at 7.5 times its earnings. A look at implied volatility shows investors looking for 28% more share price fluctuation than it has already shown. Despite today’s relative scot-free share price performance, option action suggests that this risk is to the downside.
