Stocks higher after lousy employment – volatility stays stubbornly high
VIX – CBOE Volatility Index – Investors are becoming accustomed to obscure reactions whereby bad news often sends a buy signal for example. Today's response to the highest reading of unemployment since 1993 sent stocks surging, presumably because it expedites Washington's mission.
(IBTimes) -- 02/06/2009 --

VIX – CBOE Volatility Index – Investors are becoming accustomed to obscure reactions whereby bad news often sends a buy signal for example. Today's response to the highest reading of unemployment since 1993 sent stocks surging, presumably because it expedites Washington's mission. We have noted throughout the week that investors have been more willing to sell volatility using options and today is no exception. Lower volatility infers less likelihood of larger swings in the stock market going forward. The VIX index although lower by 2.5% at 42.63 remains stubbornly high and close to its new found floor at 40.0. One trader seems to be taking this rally and weakness in option premium to initiate a long volatility combination with a 12,000 lot spread. Using the March call options the investor appears to have bought 12,000 calls at the 50 strike at 1.70 while selling the same amount at the 60 strike also expiring next month at 70 cents. The net 1.0 premium means that this trader expects the VIX index to stray back above a breakeven price of 51 by expiration. The maximum gain of 9.0 points would occur at any price above the upper strike of 60.

XLF – Financial Select Sector SPDR – The broadly firmer market tone and a rebound in shares of Bank of America after CEO Lewis put his money where his mouth is by buying 200,000 shares in the bank he runs, helped the financial sector rebound 5% to $9.57 on Friday. Investors are also optimistic that the Senate will resolve to pass a stimulus package before Timothy Geithner at the treasury unveils the framework of the so-called bad-bank plan. The call/put ratio in options on the XLF at 4.3 indicates option traders' appetite for bull plays today. The sector has been so badly beaten down for fear of further losses and potential nationalization of some of its members that a rebound is within the realms of acceptability. In the March contract the 9.0 strike calls are in demand and so far some 88,000 contracts have changed hands with 1.52 being paid as we write. Option implied volatility isn't giving up its stance and today reads 90%. We're now seeing volume in the 13 strike calls in February where buyers are paying 31 cents for rights to buy the shares at the fixed price of $13.00 before options expiration two weeks today.

MOS – The Mosaic Company – Shares of the crop nutrient and animal feed producer have jumped higher by 5% today to $43.26. Options activity today seems to be a sign of the positive movement in MOS's share price. One investor initiated what appears to be a 7,500 lot call spread in the March contract. Though the calls were traded to the middle of the market, we believe that this trader purchased 7,500 calls at the March 45 strike for 3.97 and sold 7,500 calls at the March 60 strike price for a premium of 1.00 per contract. By taking in the 1.00 premium, this investor is effectively financing the call spread and lowers his net cost to 2.97. Shares of Mosaic would need to rally to a breakeven price of $47.97 per share in order for this trader to reel in profits.

POT – Potash Corporation of Saskatchewan, Inc. – The integrated fertilizer and feed products company stood out this morning due to some interesting options plays amid a share price rally of 5% to $90.22. It appears that one 5,000 lot 75/95 March call spread was unwound today, perhaps because this investor has realized substantial profits from a previously established hunch that shares would rally. Focus has since shifted to the put side, where one investor purchased 15,000 puts at the June 65 strike price for 5.50 apiece. As shares breathe a sigh of relief on today's lift, this medium-term bear took advantage of falling put premiums and established substantial protection. We believe that this large trade contributed to the rise in option implied volatility on the stock by 17% to 77%. Though shares have reached a four month high, it appears that this trader still feels the acrid sting of POT's 52-week low of $47.44 back in December of 2008. While fertilizer seems to be the hot new item, this bear does not look to be ready to join the crowd just yet.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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