Where Did All the Volatility Go?

Today’s tickers: VIX, EEM, XLU, EWT, AA, ESLR, UNH, HOT & DE

VIX– Summer’s here – you can tell by the fact that volatility is on the wane again that investors are winding down for the summer season. The market’s fear gauge has slipped back again and stands at a level not seen since last September. Today the VIX is trading at 27.45 as most investors see less need to pay higher premiums for protective strategies. Meanwhile, signs of recovery have created the impression that a market rally might feed on itself and has prompted many investors to write options recently. There hope is that as implied volatility erodes the fact that premiums will deflate would afford profits by buying those same options back later. However, the noise coming out of the Chicago Board Options Exchange today is over a July call spread using VIX options that relies on a market swan dive over the coming 41 days before it would earn profits. One trader spent an $850,000 premium on buying 20,000 July calls at the 45 strike while selling the same amount of 55 strike calls, thus lowering the overall premium to 42.5 cents. The VIX hasn’t traded above 40 since April 21 and we’re wondering what this guy knows that no one else does. – CBOE Volatility index

EEM– Shares of the emerging markets ETF have rallied more than 2.5% today to $34.47. The fund has enjoyed a nice run up over the past four months, gaining more than 72% since March 2, 2009, when shares were trading at $19.95. A trade observed in the September contract indicates that at least one investor is crossing his fingers for continued bullish movement in the stock through expiration in September. The trader targeted the now in-the-money September 34 strike price and sold 10,000 puts for 3.10 apiece in order to finance the purchase of 10,000 calls for 2.77 a pop. The investor receives a credit of 33 cents for the transaction. He will add to today’s profits if the EEM can continue to climb higher. – iShares MSCI Emerging Markets Index ETF

XLU – The utilities ETF has experienced a more than 2.5% increase in shares to $28.02. The XLU ticker symbol jumped onto our ‘most active by options volume’ market scanner after one investor sunk his teeth into a chunk of put options in the September contract. The trader appears to have purchased about 35,000 put options for an average premium of 1.35 apiece at the September 27 strike price. Perhaps this individual is long shares of the underlying and is looking to lock into recent gains on the fund by protecting his position from potential downward price movement. Downside protection will kick in if shares decline below the breakeven point at $25.65 by expiration day in September. – SPDR Utilities Select Sector ETF

EWT– One investor expects very little near-term movement in the price of the Taiwan fund as he was observed establishing a sold strangle on the ETF today. Currently shares of EWT are higher by more than 1.5% to $10.48. The strangle was initiated through the simultaneous sale of 10,000 puts at the July 10 strike price for a premium of 36 cents apiece and the sale of 10,000 calls at the July 11 strike for 26 cents each. The gross premium pocketed on the trade amounts to 62 cents and yields very little leeway for error. Shares must settle between $10.00 and $11.00 by expiration for the investor to retain the full 62 cent premium. This individual is now exposed to losses if he has miscalculated the “window of opportunity” and shares either rise through the breakeven point to the upside at $11.62 or fall beneath the breakeven point to the downside at $9.38 by expiration next month. – iShares MSCI Taiwan Index ETF

AA– Shares of the world’s leading producer of primary aluminum have climbed higher by about 2% today to $11.72. The stock has made a significant recovery over the past three months, rising approximately 57% since touching down to a 52-week low of $4.97 back on March 6, 2009. Some option traders are hoping for continued bullish movement in the price of the underlying and were seen getting long of call options in the July contract. More than 5,000 calls were purchased at the July 14 strike price for an average premium of 28 cents apiece. Shares of Alcoa would need to increase about 22% from the current price in order for call-buying investors to begin to profit at the breakeven price of $14.28 by expiration. – Alcoa, Inc.

ESLR– The maker of solar power products is benefiting from continued optimism surrounding solar companies this week as its share price has rallied more than 12% to a whopping $2.82. Bullish call buying was seen at the July 5.0 strike price where 2,000 lots were bought for a premium of 15 cents each. An additional 2,600 calls were picked up at the medium-term September 5.0 strike price for an average premium of 25 cents per contract. While ESLR shares have managed to breach the lowest available strike price of 2.5, the stock would need to explode in order for the 5.0 strike prices to land in-the-money by expiration in either July or September. Investors long of July 5.0 strike calls would only begin to profit if shares manage a rally of 45% to $5.15 by expiration next month. ESLR appeared on our ‘top option implied volatility % gainers’ market scanner as the volatility reading burst as high as 147% today from about 122% yesterday. – Evergreen Solar, Inc.

UNH – Shares of the Minnetonka, MN-based health and well-being company have declined nearly 8% today to $23.70 after an analyst at Oppenheimer & Co. slashed the price target for the shares to $24 from $32. Over the past four weeks UNH’s stock has fallen approximately $5.20 or 22% from a three-month high of $28.90 attained on May 8, 2009. Option trades on the stock suggest mixed expectations by investors regarding near- and medium-term price movements. Some traders are hoping we have seen the bottom of UNH’s fall from grace and were observed selling puts in the nearer-term July contract. Approximately 2,800 puts look to have been sold at the just out-of-the-money July 23 strike price for a premium of 1.36 each. Put-writers may have the underlying shares put to them at an effective price of $21.64 if the puts land in-the-money by expiration and are exercised. Similar indications of a potential bottom appeared in the form of 3,500 calls purchased at the in-the-money June 23 strike price for 1.21 each. Investors were able to shave about 1.65 off yesterday’s call premium of 2.85 by getting long the calls during today’s significant share price erosion. Elsewhere, bearish traders sought to get long of protective put options as low as the September 19 strike price where 2,100 puts were picked up for an average premium of 95 cents. The price of UNH would need to decline another 24% from the current price before the September 19 strike puts yield profits beneath the breakeven point at $18.05. – UnitedHealth Group, Inc.

HOT– We’re trying to figure out why the plethora of orders in the August options at HOT today – the activity would appear to have bears’ paw-prints all over it as 27 strike calls have been sold in favor of 24 strike puts. Shares at Starwood are marginally down today at $25.25 but things could come undone on a 13% rally over the rest of the summer months. The many, many orders that are trading electronically in small amounts has us believe this is a widely followed newsletter. Curiously slightly more calls have been sold (18,000 contracts) than puts bought (16,000 lots). Typically many retail traders tend to shy away from option selling either because they don’t understand it or they are not allowed by their broker. That’s not the case today. Retail spending is currently under pressure despite today’s 0.5% rise from the Commerce Department and is widely expected to fall by 0.7% for the year as consumers save more faced with rising gasoline costs and rising jobless figures. We’re guessing that the basis of this trade is that Starwood will see lousy room occupancy this year. – Starwood Hotels & Resorts

DE – The agricultural equipment producer has experienced a slight decline in shares of less than 1% to stand at $45.33 today. DE appeared on our ‘most active by options volume’ market scanner after one individual purchased 20,000 put options at the September 40 strike price for an average premium of 2.85 per contract. The transaction is indicated to have traded as a spread and so is likely tied to stock in some way. Perhaps the investor bought the stock today and simultaneously purchased protective put options. This strategy would serve to offset any potential erosion in the value of the underlying shares beneath the breakeven point at $37.15. DE would need to decline approximately 18% from the current price before put-profits begin to amass to the downside. – Deere & Co.