The S&P 500 took a stab at the 2,100 level this afternoon and is modestly higher heading into the final hour. News flow has been light and volume is well below normal levels as well. After slipping to 2089.80 in morning trading, the S&P 500 is now up 1.79 points to 2098.78.
Treasury bonds are seeing notable weakness, however, and the yield on the benchmark ten-year is ripping to 2015 highs of 2.15%. Gold is also under pressure as well and was recently off $20 to $1203.5. Crude added 50 cents to $53.30.
Defensive sectors of the market – healthcare (XLV), utilities (XLU), and consumer staples (XLP) – are lagging. Leadership is coming from energy (XLE), basic energy (XLE), financials (XLF).
CBOE Volatility Index (.VIX) is up 1.05 to 15.74 after sliding to 2015 lows last week. Trading in the VIX pit is active heading into the expiration of February options on the index tomorrow. 292,000 calls and 258,000 puts traded on the index. Feb 15 puts, Feb 16 puts, and Feb 17 calls are the most actives in the product.
Beyond that, volume is light today. Options on the SPDR 500 Trust (SPY) and Apple (AAPL) are actively traded. Yet, at 12 million contracts, flow is light, as many players in Chicago and New York haven’t yet thawed from the bitter cold weekend.
A noteworthy trade hits Dow component Verizon (VZ), however. With shares trading for $49, the March 49 – 50 strangle on the telecomm is bought, 30000X. That is, the investor bought 30,000 Mar 49 puts on VZX for 83 cents and bought 30,000 Mar 50 calls for 43 cents.
The net cash outlay for a VZ March 49 – 50 strangle for $1.26, 30000X is $3.78 million (recall that the multiplier for an option is 100 and the math is therefore $126 X 30000). It’s unusual to see an institution purchase a big strangle (selling strangles is more common) because options are wasting assets and both legs (put and calls) will lose value due to time decay. In this case, the hefty premium purchase is expressing the view that the stock is likely to make a substantial higher or lower over the next few weeks. That is, the stock will make a move large enough to yield a profit on the puts or calls, which will more than offset the losses due to decay. Time will tell (pun, get it?).
