Wednesday Options Update: XLE, XLF, WFC, GE, CSCO, ABK, EWT, PPH

July 9, 2008

VIX – Market conviction is limp today, with indexes drawing straws at directionality over the noon hour – torn between last night’s less-dire-than-expected Alcoa (AA) earnings and a rebound for oil on geopolitical concerns and a draw in weekly inventories. The CBOE Volatility Index is flat-to-lower at 23.11 at present dispatch, showing its almost-instinctual aversion to long stays above 25. Last week, as GM shares led the market sharply lower, we noticed a minor trend among option traders to sell butterfly spreads with calls in anticipation of choppy price action on the VIX away from the 25-strike – essentially playing long volatility on volatility. With little in the way of direct catalysts to push volatility one way or the other today, it looks like the short butterfly call spread returned today at strikes 25, 27.50 and 30 in the August contract, with a trader buying 2,000 lots of the middle strike and buying 1,000lots at the 25 and 30 strikes, again in anticipation of movement in the VIX either violently above or violently below the 27.50 level.

Energy Select Sector ETF (XLE) – Testy nerves over a series of nuclear missile test-launches in Iran and lower-than-expected oil inventories sent shares in the Energy Select Sector ETF 1.6% higher to $82.72 after yesterday’s generous pullback. With more than 105,000 options trading, the bias is to puts by a nearly 3-to-1 margin. Much of the early action here appears tied up in a single 35,000-lot trade in August 84 puts, which traded to the middle of the market at $4.40. A buyer of this position is playing against the geopolitical rumblings and looking for a pullback below the $80 level (another $3 more off current levels) by August 16.

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