Today's tickers: VIX, ITMN, HD & LLY

VIX – CBOE VIX Index – We've provoked before in this space the question of where the VIX would be when the market reached new lows. Would lower equity index prices be synonymous with a higher degree of investor fear? The answer turned out to be a resounding 'no' with the VIX gently straddling the 50 index level inferring a greater degree of order as markets slumped. Today as equity prices take back their gains investors are looking ahead to March options expirations and making the bold prediction that volatility will remain part of the mix going forward. By selling around 10,000 put options at the 35 strike, investors are pocketing premium should the fear gauge remain above this level at expiration. While selling naked puts exposes substantial losses, these investors seem confident that the road to recovery will be long and littered with challenges for central bankers and governments. In other words, they don't see fear subsiding anytime soon.

ITMN – Intermune Inc. – An options trade of note caused Intermune to appear on our market scanners today. The biotech company develops and commercializes pulmonary and hepatology-related therapies and recently drew the attention of SAC Capital hedge fund, which apparently now owns a 5% stake. It's a volatile stock, which is to be expected of biotech and life sciences companies. Historic volatility on the shares at 113% compares to implied options volatility of 82%. Investor fortunes keep taking a knock at the $20.00 share price where hopes keep getting dashed. Shares are trading at $16.08 today – down 3% - and at its worst point this year, coincident with the 2008 market meltdown, fell as low as $8.66. Today's trade combination created a bullish position on the stock at a knock-down value leaving the investor exposed to upside potential on prospects for the company through January 2011. The investor combined the sale of 3,500 strangles expiring in October and used the proceeds to fund call options expiring down the road in January 2011. Ordinarily the cost of the calls would have been around 6.80 per contract, but the sale of the 12.5/22.5 strike strangle reduced this to 2.50. The investor is expecting the shares to remain range bound this year, but clearly expects better things of the market and for product announcements to be forthcoming by expiration. If all goes well, the investor faces an upside breakeven share price of $25.00.

HD – Home Depot - Shares in the do-it-yourselfer are lower by 2.5% at $20.16 today, while options activity suggests an investor is defending a long stock position by simultaneously buying August at-the-money puts at the 20.0 strike for 3.0 and selling calls at the 27.5 line for 54 cents. In so doing the investor is mitigating the risk of exposure to the company and essentially offsetting the declining share price below $17.46. A long put position would lessen that breakeven to $17.00. In exchange for the extra cushion here the investor appears happy to have the stock called away at expiration should it have its plumbing and electrics back in good working order at the 25.5 strike. Implied volatility is at 51% on its options today.

LLY – Eli Lilly & Company – The pharmaceutical company edged onto our 'hot by options volume' market scanner and caught our attention due to a covered call initiated in the October contract. Despite the 1.85% share price decline to $32.30, one investor revealed guarded optimism on the stock. At the October 42.5 strike price, the trader appears to have purchased shares of the underlying stock while simultaneously selling 7,700 calls for a premium of 64 cents per contract. We believe that this investor is using options in order to zero in on a target price at which to exit his underlying position – in other words, to have the shares called away from him should their price rise to $42.50 by this coming fall. If this is indeed what has occurred, the trader pockets the 65 cent premium and sets himself up to make a gain of 31.5% on the shares if the calls land in-the-money by expiration.

Andrew Wilkinson

Senior Market Analyst

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