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Option Watch: SP-100 Most Active

Chris Tyler, Optionetics.com
December 21, 2010

Dow and SP-100 component American Express (AXP) began the holiday shortened workweek in Grinch-like fashion Monday. The financial services outfit and credit card issuer was cut by Stifel Nicolaus to “Hold.” Analysts cited the company’s high negative exposure to an imposed cut in debit interchange fees in the aftermath of last week’s Durban Amendment.

Shares finished the session down a Dow-dragging -3.43% on heavy volume. The price action effectively broke what had been a nicely-shaped eight month long “W” base and could find bears looking to take the upper hand due to Monday’s pattern breaker.

On the more ho-ho-hopeful hand, shares of AXP did close above its “golden cross” and 50% supports after a volatile and loose intraday breach at session lows of 41.25. For their part, option traders appear to be torn based on a very heavily-traded but equal put/call of 0.96.

On the session, AXP saw nearly nine times its daily average option volume with a tally of 84,000 contracts changing hands and worthy of putting the name in the top spot for unusual option activity.

Most active by a fairly wide margin on the put side, the out-of-the money January 40 put traded nearly 8,400 times with open interest nearing 15,000. Priced at $0.49 on implieds of 28% - 29%, the contract carries a typical higher OTM skew compared to the ATMs which were also bid on the session as net buyers seeking protective strategies likely dominated the order flow.

In general, call and put values are still closer to range lows of the past couple months and look mostly fair compared to various statistical volatility values. However, while 32 calendar days remain, January premium is nearing that time in a contract’s life when theta or decay risk grows larger.

Additionally, with the next two calendar weeks holding two holidays, premiums could be put under additional pressure as traders attempt to discount the period with forward looking optimism of a quiet period forthcoming into year’s end.

NASDAQ 100 heavyweight and internet retail goliath Amazon (AMZN) took the No. 2 “unusual volume” spot in the SP-100 with its 118,500 contracts versus a daily take of 14,000. Shares traded up by 3.22% benefiting from a target raise to $195 at Barclays and 3-Weeks Tight base pattern to entice ho-ho-hopeful bulls into breaking out the stock to fresh all-time-highs.

Figure 1: Amazon (AMZN) Daily

On the option side, ye ol’ faithful bulls appear to have been the most active shoppers on the day with a put/call of 0.66. The most popular item on the board by “crowd proxy” was the December Weekly 180 / 185 vertical with volume of roughly 10,000 contracts for each contract. Expiring on Thursday, the spread is priced at $2.85 with shares at 183.29. As much, the vertical has intrinsic value of $3.29 and what would amount to as a small profit if shares were to close there come expiration.

Also popular with traders, January 180, 185 and 190 calls all saw heavy volume relative to existing open interest. Implieds are closer to range lows than not and mixed but mostly fair relative to its 20 and 90-day statistical volatility. While I’d opt to give the least amount of credit or influence to the much lower “teenage” 10-day SV reading due to the abnormally tight base just cleared Monday—there is that theta influence to consider with January premium and of course naked long December Weeklies, if used in that capacity.

Figure 2: Illustrated 3x Feb / Jan 190 Calendar

Finally, the February 190 call which just went on the board saw nearly 5,200 contracts trade. With earnings scheduled for January 27 and falling outside the January cycle and a skew of several points between that contract and January, its likely traders stepped into February as buyers. What “buyers” means for certain isn’t known. However, two probable vehicles for positioning would be as either outright opening bulls or as part of an opening calendar / diagonal or roll closing down January altogether.

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site