For the first time in more than a couple Tuesdays, the broader market was down a benign 2.99% in the S&P500 (SPY). “Benign” is relative, of course, as the price schnitzel, i.e. profit-taking, does come on the heels of the most prolonged and exaggerated bout of market volatility in our lifetimes. Surprising to some to be quite sure, the price action also represents an inside day contraction and the second mildest session of the month. As recent lows continue to hold and still fearful levels of implied pricing exist—“benign,” as well as “stabilization,” does seem to represent another side of Tuesday’s headline-awful action.

In the options market, headline drivers such as “Corporate Outlooks Gnaw on Bulls”, “Steve Jobs Attacked By Bears” or “@%$%! Citi Stinks Yells Goldman” did receive more than just a passing interest with traders. In tonight’s piece, let’s take a look at two of the three slightly fictionalized media accounts to see what more than a few bulls, bears and hedge hogs were up to.

“Steve Jobs Attacked By Bears.” A week ago, the man synonymous with Apple (AAPL) was reported to be hospitalized. In Tuesday’s session, with shares off more than 7% in front of its earnings report, if there was to be further rumors—the bears were likely culprits. Contract volume rang up as the heaviest for NASDAQ 100 component stocks. Versus a typically heavy 358K, just more than 436K options traded on the day.

Following typical protocol, even during the hard decline in recent weeks and today’s decliner, call volume held the edge. A margin of 1.25 to 1 or a put/call ratio of 0.80 was very much in keeping with an average reading of 0.82. The most prized vehicle on the day were the November 100’s, which closed at 5.45 on implieds nearing 82%.

With prices staying mostly where they were from Monday’s levels, buyers of the November option were obviously still apparent. Much like the market though, the influential and high beta stock has seen its earnings ride (lift) for volatility bulls’ shift into reverse since late last week. As much, with prices stabilizing overall and implieds everywhere coming down, of the 33,000 November 100’s which traded, traders should remember that for every contract purchased, one is sold.

Of course, with Apple one of those known or anticipated earnings movers and straddle values estimating an approximate 11% move, buying an OTM spec can’t be entirely faulted. In lieu of the broader market’s bottoming bias, the calls in particular, hold favor with this non-positioned observer. On the other hand and fully aware of Apple’s After Hours ‘save the world’ bid nearing $104—buying a naked call with nearly 5.50 points of extrinsic value in an environment likely to continue shedding its volatile ways, isn’t a position I’d commit too without a hedge.   

Elsewhere, an edited version of ““@%$%! Citi” Stinks Yells Goldman”” could be found in Tuesday’s session. A downgrade to “Sell” of Citigroup (C) by the broker, as well as being put on its Conviction Sell List, helped secure a loss just more than 6%. The action in the options though, while heavy, wasn’t nearly as secure or easy to appreciate as being @#%$!, umm crappy.

Figure 1: Citigroup (C) Risk Reversal

Most active on the session and far removed from today’s sell signal of sorts, were the June 20 calls and 12.50 puts. Just more than 20K of each traded on the day, with blocks of about 18K during the final hour of trading and shares near 14.50. With earnings having come out last week and implieds well removed from recent highs, a likely candidate for the net neutral delta play could be a long strangle.

If one were to believe that statistical movement could remain elevated, that strategy would seem appropriate. Personally and as inferred by the Apple analysis, even if the market were to ultimately head lower, we’re unlikely to see frothier levels of panic and sheer price volatility like we’ve just been privy to for the past couple weeks. That being said, I’m of the mind the traders behind the trade likely established a bull collar or perhaps a risk reversal where the put was sold and call purchased without entering into a stock position. The bullish delta strategy would take in the net 1.27 credit [Puts @ 2.50 and Calls @ 1.22] between 12.50 and 20 and looks a bit like the graph above in Figure 1, except a whole lot more mad money would be involved if shares cracked well south of the breakeven.


Chris Tyler
Staff Writer & Options Strategist
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