Flash Crash Black Monday action …

Today’s Bullish Trading

Despite the high levels of volatility and the substantial market losses suffered in August, some individual names continue to see bullish order flow – as investors take positions in options rather than shares of specific beaten-down companies. Dendreon (DNDN), for example, lost $2.19 to $10.37 today and has tumbled 71 percent since earnings were reported last Wednesday. Yet, sentiment in the Seattle, WA biotech seemed decidedly bullish today as about 28,000 calls and 6,200 puts traded in the name. The top trades of the day were part of a spread, in which the strategist apparently bought 2,900 Sep 12 calls at $1.18 and sold 2,900 Sep 18 calls at 23 cents. They paid a 95-cent debit of the spread and are probably using the position to play a bounce in the stock. That is, instead of buying shares, they’re locking in the right to buy or “call” the stock at $12 through the September expiration. They could have it called away at $18 (the higher strike) if shares rally beyond that level through September expiration.

Bullish trading was also seen in Weatherford (WFT), Virgin Media (VMED), and Human Genome Sciences (HGSI).

Today’s Bearish Trading

Bank of America (BAC) saw a surge of options activity today. Shares sank $1.66 to $6.51 in volatile trading after an analyst suggested the bank might need to raise capital. The bank was out with a statement today saying that it has more than enough capital. Yet, given the volatility in the financial markets lately, BAC shares were aggressively sold today and options volume hit more than 3X the average daily for the bank. An impressive 662,000 calls and 969,000 puts traded in BofA Monday. August 10 puts, which are now 34.9 percent in-the-money, were the most actives. 74,530 traded. Jan13 12.5 calls, Jan 5 puts, and Jan13 20 calls were very busy as well. Players are jockeying for position in the options in anticipation of the next move in the bank. Consequently, implied volatility in BAC options surged 69 percent to 145.

Bearish flow also surfaced in Research In Motion (RIMM), Quicksilver (KWK), and Masco (MAS).

Index Recap

CBOE Volatility Index (.VIX) added 16 points to close at session highs of 48. The volatility index made a run higher early and then the rally gained additional momentum in the late-afternoon. The market’s “fear gauge” is now at its best levels since May 21, 2010, when the index briefly touched 48.2. VIX has rallied 200 percent in the past month! The surge in the volatility index reflects the bearish sentiment and high anxiety levels that investors now face. Index option volume has been heavy as well. 1.25 million puts and 643,000 calls traded on the S&P 500 Index today, which is more than double the average daily volume for the SPX trading pit. CBOE Volatility Index tracks the expected volatility priced into S&P 500 Index options and tends to move higher when there is aggressive buying of puts to hedge stock portfolios.

Analyzing the ETF Market

SPDR Oil Exploration and Production Fund (XOP) saw a day of heavy trading. The ETF, which holds shares of major oil companies like Chevron and Exxon, tumbled $5.99 to $47.12 after crude oil prices plunged $6.29 to $80.59 a barrel. Meanwhile, options volume in the fund was 6X the average daily. 180,000 puts and 12,000 calls traded in the XOP today. The top trades were part of a ratio spread, after an investor sold 35,000 September 55 puts and bought 52,000 September 50 puts on XOP. This spread likely rolls a position down in strikes after the big move lower in shares. That is, they’re closing out a position in the 55s to open a new larger position in the 50s. XOP is down 24.3 percent month-to-date and both contracts are now in-the-money.

Posted in Commentary, Futures, Stocks Tagged with: , , , , , ,