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Option Watch: SP-500 Most Active

Chris Tyler, Optionetics.com
January 7, 2011

Entering Friday’s second half and while the SP-500 (SPY) is under modest jobs, Bernanke and mortgage securitization duress, grocer Supervalu (SVU) is seeing unusually heavy and lopsided put activity of nearly 47,000 contracts compared to about 6,200 calls. With implieds bid to three plus month highs, bears appear to be reacting to a triple dose of bearish catalysts in the name.

This morning it was announced SuperValu’s VP of Merchandising and Logistics “is leaving immediately”, while broker Susquehanna cut its price target on shares in front of next week’s earnings. Not helping matters is a confirmed break this week of a bearish flag; that is unless bulls set their sights on a potential two plus year double bottom pattern nearing a test.

Most popular with Friday’s likely bearish contingency, the January 7.5 put and February 8 put have seen concentrated activity of 23,000 and 13,000 contracts respectively. With January sporting 27,000 open interest obvious net buying based on a 20 point jump in front month ATM implieds is a likely mix of closing and opening activity. February’s trading appears to be unequivocally opening with implieds jumping about 15% or 7 to 8 points to 58% for the at-the-monies.

Priced at $0.18 per contract mid market, the January 7.5 put will require a move of about 17% by expiration to double in value, while the February 8 put at $0.38 needs about 16% with its additional 28 calendar days to help improve those bear’s chances.

In the No.2 spot of unusual volume within the SP-500, homebuilder KB Homes (KBH) has traded about 6.5 times its normal contract levels on volume of 32,000. Favored call volume by a two-to-one margin is reacting in sympathy with shares building gains of nearly 7% but not necessarily indicative of any authoritative call buying.

The bullish reaction in KBH follows the company’s surprise profit beat of $0.23 per share versus Street estimates calling for a loss of -$0.17 per share on stronger average selling prices during the quarter. Most active, a bit more than 11,000 Jan 14 calls have traded.

Priced at $1.23 on an implied volatility crush into the low 40s and near fair value compared to statistical range short and longer-term gyrations of the past couple months. Today’s pricing compares to last night’s at-the-money admittance price of $0.85 per contract, 59% IV and much lower volume of 1,250. As much, it’s estimated a good deal of the action is closing rather than fresh initiating from prior softer delta bulls of more than one type and maybe even a bear or two.

Options in Wells Fargo (WFC) are in the third spot with contract volume jumping above 200,000 compared to its daily take of 62,000. A Massachusetts Supreme Judicial Court ruling against the banker, as well as US Bancorp (USB), regarding two foreclosed properties, has bulls worried about the treatment of mortgage securitization by banks.

With shares of WFC off -2.25%, volume in Well’s calls and puts is fairly even and nicely spread across months and strikes. Of notice, there does appear to be buy-side sponsorship from investors as evidenced by a decent but not spectacular jump in implieds to three month highs. Wells Fargo is set to report earnings on January 19.

Finally, AK Steel Hldgs (AKS) rounds out the top four with more than 31,000 contracts changing hands versus its daily average of 10,700 on fairly even activity in both its calls and puts. Shares are off -6.25% in a sympathetic reaction to Schnitzer Steel’s (SCHN) profit miss.

Implieds for January and February are near three month highs but mostly unchanged on the session. Premiums are priced for a coming volatility crush after the company reports on January 25 and it’s likely Friday’s price drop in shares has attracted some early interest from option traders looking to “sell a little sumthin” other than stock.

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