Options sellers see orderly declines


Stocks fell again today, but traders apparently think that the declines will be orderly.

optionMONSTER's tracking systems detected the sale of more than 4.3 million options across the eight exchanges in yesterday's session. That's 29 percent more than average, even though overall options volume was 22 percent below normal levels.

Put selling occurred in such names as Campbell Soup, Cintas, Safeway, and Iron Mountain as investors looked to earn income by insuring the stocks against significant drops.

"A lot of people don't think it's going to get more volatile, so they are selling," said Group One's Jamie Tyrrell, designated primary market maker for VIX options at the Chicago Board Options Exchange. The VIX, which measures the cost of insuring the S&P 500, is a broad measure of the cost of options across the market.

IRM Chart In Iron Mountain, investors sold 12,620 July 20 puts for $0.15 against open interest of just 111 contracts. The document-management and shredding company fell 1.80 percent to $22.97. IRM would have to fall another 13 percent by expiration for the investor to lose any money.

Traders sold 5,700 July 20 puts on Safeway for $0.40 against no open interest, pushing total options volume in the supermarket stock to about 6 times greater than average. SWY fell 0.61 percent to $21.17.

Given that out-of-the money contracts derive all of their value from their time until expiration and the stock's implied volatility, selling options reflects a belief that volatility is too high.

The S&P 500 fell 1.35 percent to 1,050.47 in the session and has been trending lower for the last six weeks. However, the VIX closed the session at 36.57 percent, which means options are already pricing in a move of about 2.3 percent.

"We not seeing premims pushed a ton higher this time around," Tyrrell added. "It seems as if the market is saying this type of selloff is possible, but a 5 or 10 percent selloff they don't see as likely.

(Chart courtesy of tradeMONSTER)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing , Options

Referenced Stocks: CPB , CTAS , IRM , SPX , SWY , VIX



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