Today's tickers: VIX, XLF, BAC, KEY, FDO & GLD

VIX – CBOE Volatility Index – The poor reception afforded to Mr. Geithner's speech in which little was revealed, reminded investors that more turbulent times may be ahead without some sense of resolution to the health of banks' balance sheets. Implied volatility, Wall Street's fear-gauge added 7% to 46.8 today. We're still trying to unravel the pattern of options trades here. In the March contract, it appears that 2,000 put options with a 32 strike may have been sold at 95 cents in order to fund the purchase of 70 strike calls at 60 cents. That would give the investor a credit, but admittedly facing potential downside risk should volatility subside beneath 31.65. It seems to us that buying a strangle here at 1.55 doesn't make a whole lot of sense given the magnitude of the move required to turn this trade profitable (we can see the calls were bought). Elsewhere the March 45/60 call spread was initiated 2,000 times at a net premium of 2.35, which gives a breakeven at expiration of 47.35 on the VIX index.

XLF – Financial Select Sector SPDR – President Obama's press conference last night fueled more nervous anticipation for Treasury Secretary Geithner's speech today regarding the Financial Stability Plan. The banking index jumped with activity this morning with option investors vying for positions amid all of the uncertainty in the financial sector. Shares are currently down over 2% to $9.64 today, prompting one investor to sell 10,000 calls at the February 11 strike price for a premium of 26 cents per contract. Another XLF pessimist sought downside protection by purchasing 20,020 puts at the March 7.0 strike for 26 cents apiece. Shares would need to decline to $6.24 in order for this bear to breakeven on his trade. One investor played today's 88% implied volatility rating and initiated a 4,000 lot strangle in the June contract. At the June 8.0 strike, 4,000 puts were purchased for 94 cents each, and at the June 10 strike price, 4,000 calls were bought up for 1.66 per contract. The net cost to the trader is 2.60 for the strangle, yielding breakeven points of $5.40 on the downside and $12.60 on the upside. This investor seeks a sharp directional movement in order to profit but would also benefit from a rise in implied volatility, which would serve to boost the premiums commanded on either option.

BAC – Bank of America – Heavy two-way options activity accompanies a 14% slide in shares to $5.90 at BoA today. Overall options volume of 376,000 contracts has traded by noon, while option implied volatility is lower at 190%. Just ahead of midday one investor sold 20,000 March expiration calls at the 8.0 strike at a 67 cent premium. It's hard to state with any conviction that this investor isn't bailing out on what looked like a good position yesterday or whether this is a fresh short take on the shares, which are struggling to gain traction following Treasury Secretary Geithner's maiden speech.

KEY – Keycorp – One of the leading volatility gainers according to our market scanners today is at regional lender, Keycorp. Its shares have recently been pushing the ceiling of a $6.00 - $9.00 range and today investors have dumped them unceremoniously right off the roof. At last count they were 19% lower at $7.28 while options implied volatility raged 30% higher to 143%. The price of protective put options at the February 10.0 strike virtually doubled to 2.50 per contract where investors grabbed around 2,100 lots. At that strike very little open interest exists as investors built new positions. At the same strike on the call side it appears that investor ditched 1,400 call options at a dime apiece in expectations that today's Treasury plan won't benefit Keycorp.

FDO – Family Dollar Stores – The discount retailer received a vote of confidence from one option trader today even as shares dip slightly by 1% to $27.16. Amid the strong financial earnings and the fact that FDO seems to be a recession-friendly place to shop for cash-strapped consumers, this investor opted to reel in pure premium. In March at the 22.5 strike price, this dollar store bull sold over 12,000 puts for a premium of 30 cents per contract. As long as shares remain above $22.20, this trader can breathe easy.

GLD – SPDR Gold Trust – Even before the stock market was able to take the opportunity to react negatively to the latest government plan, the price of gold had headed higher overnight to around $915 per ounce on the February contract. Gold is once again a vogue topic for those who believe that the current economic situation will debase the dollar with economic agents resorting to hoarding physical gold to protect their wealth. We're unsure how much a loaf of bread would cost in terms of gold these days, but we are more sure that these investors are telling us that gold will extend its gain to $1,000 per ounce before the March option contract expires. Investors paid 1.30 in premium to buy call options allowing them to buy shares in the GLD sector fund at a fixed $100.00 per share (the fund is pegged on a ratio basis to the spot price of gold and that price would be equivalent to $1,000 per ounce).

Andrew Wilkinson

Senior Market Analyst

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