Markets

Call Writers Target Huntington Bancshares Incorporated

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Premium sellers have set their sights on Huntington Bancshares Incorporated (HBAN - 6.72) lately. During the past 10 sessions, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange ( CBOE ), and NASDAQ OMX PHLX (PHLX) have sold to open 5,050 calls on the regional lender.

As a point of comparison, traders on these exchanges have bought to open just 1,499 calls on HBAN during this time frame. In other words, options players have initiated approximately 3.37 times more short calls than long calls over the past two weeks.

In the front-month series, call sellers have taken a shine to HBAN's May 7 strike. There are a total of 17,279 contracts in residence at the May 7 call, and it appears that the bulk of these contracts were sold to open. Speculative investors who sold these calls are most likely looking for HBAN to remain pinned at or below $7 through front-month expiration, which would allow them to retain the entire net credit on the trade.

With May-dated options due to expire at the end of next week, this could actually become something of a self-fulfilling prophecy. HBAN is trading just below that popular 7 strike, which means the shares could encounter options-related resistance in the region during the short term.

The technical outlook for HBAN also favors call writers. Since early March, the stock has been stifled by looming resistance at its 80-day moving average. This trendline, located near $6.90, has served as a staunch technical ceiling during the past couple of months, and could continue to keep HBAN under pressure during the coming weeks.

That being said, it's not necessarily the most lucrative time to sell premium on HBAN.

In fact, the chart below reveals that implied volatility on HBAN's short-term options -- as measured by the Schaeffer's Volatility Index (SVI) -- has trended steadily lower during the past year. The current SVI of 32% is up from the indicator's April 28 annual low of 24%, but not by much.

When implied volatility declines, option premiums will generally follow suit. As a result, traders looking to sell option contracts should seek out situations where implied volatility is running relatively high. All other things being equal, higher volatility levels will translate to a higher upfront premium payment -- and, since this amount represents the maximum potential profit on a straightforward call-write position, it's worth making sure you're getting a favorable price for your option.

The spring 2011 issue of SENTIMENT magazine is now available here.

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

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

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Schaeffer's Investment Research, Inc. has been providing stock market publications, market recommendation services and stock option education since its inception in 1981 by founder and CEO, Bernie Schaeffer.

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