Quick VIX

Yesterday as the Dow broke out to new highs the biggest trade of the day went up as one trader bought 600 March 141 DIA calls for 1.06. Oh wait, that was us. As the market gained momentum yesterday we decided to added some fixed risk upside exposure for clients to take advantage of a possible breakout in the Dow. We liked what Bernanke had to say, which was basically that easy monetary policy is not going anywhere anytime fast. We don’t like to fight the Fed, and if interest rates are going to continue to stay low risk assets will continue to appreciate. As if to prove this the New York Fed stepped up yesterday and made their largest asset purchase yet this month. Yesterday the VIX crashed down nearly as fast as it had gone up just days before, which shows just how fast Bernanke was able to remove the fear in the markets. A low VIX also means that option premiums are lower, which makes buying call options more attractive. Technically the DIA looks poised to make a run for new highs. W...

Yesterday there was unusually high call option activity in Direct TV. The largest trade of the day was the purchase of 8000 June 55 calls for $0.54 with the stock at 48.25. This is a bullish bet that DTV will be above 55.54, 15% higher, at June expiration. The stock is modestly lower on the year and is currently sitting near a level of technical support at 48.00. This trader is betting that this level of support holds and that the stock rebounds higher over the next couple of months. Direct TV reported earnings on February 14th and gave investors a few reasons to be bullish. The company reported that revenues increased 8%, in line with expectations, and blew away the consensus EPS estimate of $1.03 by reporting $1.55. They also added 10.3 million new subscribers in Latin America during FY2012, which was the biggest driver of growth. Going forward DTV is betting that emerging markets will give them the best bang for their buck and are investing heavily in Latin America. Recently Direc...

Yesterday shares of Morgan Stanley closed down 6.6%, leading the broader market down as fears of a hung Italian parliament looked like an increasingly likely scenario. Morgan Stanley was one of the hardest hit stocks in the S&P 500 because of its exposure to European peripheral bonds. The stock saw extremely high option volume yesterday, with 9.5 puts trading for every call. One of the biggest trades of the day was the purchase of 20,700 Oct. 23 puts and sale of an equal number of Oct.18 puts. The trader paid a net debit of $1.79 for this put spread, which was put on when the stock was trading 22.75. Time has shown that when the market is spooked over Europe, Morgan Stanley is one of the first stocks to be sold. This is because the company is seen as the weakest of the “too big to fail” banks. Last year the bank made a lot of progress and posted earnings of $1.59 a shares versus a net loss in 2011. Revenues also increased to $30.514 billion in 2012 from $28.555 billion in 2011. Bu...

On Friday, March 1st the sequester is scheduled to take effect and will remove about $45 billion from Pentagon programs. Despite this Lockheed Martin saw heavy call option trading on Friday with 5 calls trading for every put. The biggest trade of the day was the purchase of 5000 April 92.5 calls for $0.65 with the stock at 88.50. This is a bullish bet that the stock, which is down 4.5% year to date, will rally at least 5% over the next month and a half. Right now there are two risks facing this stock: the sequester, and the Pentagon’s grounding of the F-35 Joint Strike Fighter. Despite the looming deadline for the sequester the defense and aerospace sectors are holding strong near 52-week highs. Although Lockheed is off of its lows it is well off its 52-week high, demonstrating relative weakness to its peers. Lockheed has said that they expect sales to be flat as a result of government budget cuts. To make up for this the company is looking to cut costs and increase sales abroad. The...

Yesterday there was unusual options activity in Sears Holdings. One traded made a large bullish bet on the long term performance of the stock by buying 10,000 January 2015 60/70 call spreads for a net debit of $2.50. This trade will profit if SHLD is above 62.50 in two years, and can return a total of $7.50 is SHLD is at or above 70 at expiration. The total risk is limited to $2.50 if SHLD is below 62.50, meaning that this trade has the potential to return 300% on investment. However, this definitely a speculative play considering that SHLD was trading 47.30 at the time of the trade which means the stock would have to rise 32% for this trade to be profitable. The problem is that Sear’s is not a profitable company and does not expect to be anytime soon, which makes a 32% rally in the stock unlikely without a major change. Since its merger with Kmart in 2005 Sears has seen revenues and profitability decline. Free cash flow has been negative since 2010, and consensus expectations are for...

Yesterday shares of GM led the market down, closing down over 2% and extending the losses it has experienced since reporting earnings on 2/14. Option activity was bullish however, with calls trading nearly twice their average daily volume. Much of the volume was concentrated in the June 35 calls which traded 35,580 contracts, 98% of which were bought. It appears that one trader bought the bulk of these in a single block trade. The trade went down at an average price of $0.,14 with GM at 27.70. This is a bullish trade that will profit if GM rises by 27% over the next 120 days. Last Thursday GM reported solid fourth quarter earnings. Revenue rose 3% year-over-year to $39.5 billion and earnings per share rose 23%. What has sent the shares down since then was that North American operating margins declined 0.70% year over year to 5.8%. GM’s European division lost $700 million in the fourth quarter and $1.8 billion for the year. The picture is a bit brighter in South America, where GM has a...

Yesterday Stanford C Bernstein downgraded shares of Vodafone to under-perform and adjusted their target share price downward. This sent the stock down 2.5% on the day and towards a major technical level for the stock. These enticed option traders to make bullish bets, expecting the stock will bounce off of support at 25. The biggest trade of the day was the purchase of 10,000 July 27 calls for $0.55 and the sale of 10,000 July 23 puts for $0.69. This trade is known as a risk reversal and was done for a $0.14 net credit. If VOD closes between 23 and 27 at July expiration, both options will expire worthless and the trader’s profit will be the $0.14 credit collected. If VOD rises above 27 the long call will come in to play and the trader will profit off of the stock’s upside. The risk in the trade is below 23, where the trader will be obligated to buy the stock at expiration. The 25 level is an important area of support for VOD that was tested several times in 2011 and 2012. The...