Selling volatility in CIT (CIT) boosts call volume

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CIT Group Inc. (NYSE: CIT ) shares are outperforming the broad-market losses on the day ahead of the holiday weekend, but at least one investor chose to boost options volume on a bet that volatility could subside during the longer term.

CIT gained 83 cents to $34.09 during afternoon trading on Friday following news last night that the company thinks it is making progress on key initiatives, especially funding flexibility. The company also confirmed yesterday that they will release earnings results on July 27 before the market opens. A look at call volume on the tape suggests an investor thinks that these initiatives could lead to steady times for the company, and so they sold calls on a bet implied volatility will decline.

At 12:43 p.m. EST, blocks of 6,700 January 2011 35-strike and 41-strike calls changed hands for $4.15 per contract and $2.09 per contract, respectively. The lower-strike calls are home to current open interest of 2,500 contracts while the current open interest of the higher-strike calls is just six contracts, indicating the investor initiated the options action to open. Both prices were right at the bid price when the volume hit the tape, meaning the investor collected a net credit of $6.24 for both sold calls.

A look at time and sales on CIT shares shows a block of 676,000 traded around 12:40 p.m. EST for $33.48. This is roughly the amount of shares necessary to hedge these call options delta neutral. That suggests this trade could be more of a volatility bet than a directional play. The implied volatility of the Jan 35 call is 49, and the 41-strike call is 45. That compares to a realized volatility of just 33 for the last six months. You can see how if those implieds were to decline towards the historical realized volatilities, they have room to move lower.



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.



This article appears in: Investing , Options

Referenced Stocks: CIT

Jud Pyle

Jud Pyle

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